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Top Down Stock Market Trading Strategy

Justin33 | Dec 30, 2009 |

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Trying to pick the right stock to trade is the one question that can never be answered with 100% confidence. The stock market is a funny thing, almost every trading rule ends the same way: unless the market goes against you. Many rules that have been long followed were bend or broken in 2008 and 2009. Even some trading models developed and taught in colleges and universities were tossed out and labeled not applicable to the market anymore. This may be due to the fact that the major force of the market is driven not by logic but by emotion. The irrational nature of fear is what really drives the market on many different time frames. The fear of losing what was gained in the market and when a trade has gone wrong and money has been lost. Picking the right stock starts with understanding the one of the more common ways to sift through the thousands of stocks out there and arrive at a few possible candidates.

Before attempting a stock purchase, it is important to understand the basics. One type of analysis is called the Top Down approach. This is where one starts by choosing and analyzing a specific market (like the American or Canadian market). Once the choice is made the overall direction is gauged using an index of that market (like the DOW or S&P 500). Depending on what style of trading one will engage in will determine what time frame will be focused on. The next step is looking at the sectors and choosing one sector to focus in on. Through familiarizing yourself with that industry and what moves it in the market, you can determine if this is the best time to engage and make the best investment. The last step is to look at the specific companies within that sector to pick the best few candidates to trade with.

The Top Down approach is used by many of the professional money managers and professional traders in today's market. Understanding the basics is the best way to get a handle on trading the market and creates a solid foundation for more advanced concepts. It has lasted the test of time and seems to be positioned to endure for years to come. Before engaging in any type of investing or trading, consider seeking the advice of a professional.