Build the big picture6 questions, always in the same order.
The market factors only help when you put them together in the right order. 6 questions take you from the economic cycle to the asset you trade, and show which side the big money is likely on before you open a chart.
Why the order matters
Most traders go straight to a chart and look for reasons afterwards, which means collecting only the facts that fit the trade they already wanted. A chart without context is just lines: it shows what price did, without saying why, or which way the larger forces are pushing. The big picture tells you which way the wind is blowing before you pick a trade.
You already know the pieces from this module: the economic cycle, central banks and the money supply, bonds, the dollar, commodities and currencies. The skill is to put them together in a fixed order, from the broadest force down to the market you actually trade. The first 3 questions describe the backdrop for every market. The last 3 apply it to yours.
Use the ISM PMI: near peak growth, slowing, or close to a recession?
Are central banks cutting and printing, or hiking and pulling money out?
Short-term yields show rate expectations, long-term yields inflation.
Stocks, commodities, bonds or currencies.
Mostly the dollar, growth and the money supply. Safe havens react to fear.
Keep the big picture in mind every time you trade.
Questions 1 to 3: the backdrop
The first question asks which phase of the economic cycle we are in. Your tool is the ISM PMI, read the way its lesson showed: the big cycle first, then the last 5 years, with 46 as the line to watch.
The second asks whether the money supply is being increased or reduced, and that is the job of the central banks. Are they cutting rates and buying bonds, or raising rates and pulling money out? Listen to their tone as well as their decisions, because the tone shifts first.
The third asks what the markets believe about the money supply, and the answer is in government bond yields: the short ones for rates, the long ones for inflation.
Questions 4 and 5: your market and its drivers
The fourth question is which asset class you are interested in: stocks, commodities, bonds or currencies. The choice comes only now, because the first 3 answers apply to all of them.
The fifth asks what drives that asset class. For most of them it is the US dollar, economic growth and the money supply, but the details differ by market, as the lessons on stocks and bonds, the dollar, the currency groups and gold and oil showed. The drivers decide how the backdrop from the first 3 questions reaches your trade.
Question 6: keep it in mind with every trade
Once the first 5 answers are written down, they become the backdrop for every trade you take. If the cycle, the central bank and the bond market all point the same way, trade with that current. A setup on the chart that agrees with the big picture deserves more attention than one that fights it.
The note below shows what that looks like for a currency trader. Growth is picking up, the Fed is turning towards hikes and 2-year yields agree. All 3 answers point to a stronger dollar, so long dollar setups go with the current, and a short dollar trade needs a very good reason.
You don’t need to predict every move. You need to know which side the big money is likely on.
ISM PMI rising from 48 to 54: growth is picking up
The Fed has stopped cutting and talks about hikes
2-year yields rising: the market expects hikes
Currencies, pairs against the dollar
Fed policy and US growth against Europe and Japan
Favour long dollar setups. Short dollar trades need a strong reason.
Keeping the note up to date
Answer the 6 questions before the week starts and keep the note next to your screen. Compare it with this week’s Smart Bias and look closely wherever the 2 disagree.
A surprise in the ISM PMI, a central bank decision or a sharp move in bond yields can change one of the answers. The cycle moves slowly, but the tone of a central bank and the level of yields can change within a week, so update the note the same day.
In short
- A chart without context is just lines. The big picture tells you which way the wind is blowing before you pick a trade.
- Ask the 6 questions in order: the cycle, the money supply, what bonds believe, your asset class, its drivers, and how it all applies to your trade.
- When the cycle, the central bank and the bond market agree, trade with that current, not against it.
Questions
What if the answers point in different directions?
Then the current is mixed. Trade smaller, pick markets where the answers do agree, or wait until the picture clears.
Key terms
- Economic cycle
- The repeating pattern of growth, peak, contraction and recovery that every economy goes through.
- ISM and PMI
- Surveys that ask purchasing managers whether business is getting better or worse. Above 50 means expansion, below 50 contraction. A leading indicator.
- Money supply
- The total amount of money in an economy. More money chasing the same goods tends to push prices up.
- Bond yield
- The return an investor earns on a bond. Yields rise when bond prices fall. Short-term yields follow rate expectations, long-term yields follow inflation and growth.
- Commodity currency
- A currency of a country that exports a lot of raw materials, like AUD, CAD or NZD. It often moves with commodity prices and global growth.
- Safe haven
- An asset investors buy when they are scared, such as the Japanese yen, the Swiss franc, gold or US government bonds.