Top-Down Method Basics
We will now look at a method that you could use in real successful swing trading. This is a method that is used all over Wall Street and among many successful swing traders.
In order to determine if the market is bullish or bearish you will need a systematic approach. You will also need a systematic way to determine how strong the bull market is or how weak a bear market is.
After you have determined the outlook of the market you should find the best sectors to trade in, and finally identify the best stocks and pinpoint when to open your trades. This process is called top-down analysis. You move from the top to the bottom. Market, sector and stock.
This article is based on our online Point and Figure Chart solution. We offer all the tools you need to succeed with top-down analysis. We have a unique approach to finding the best stocks to trade. This means we first look at the market, then at the market sectors, and finally at individual stocks in the sectors. And the idea is that if the market goes up we want to find sectors that go up, and then concentrate on stocks in those sectors. And vice versa in falling markets, look for weak sectors, and concentrate our short selling of stocks in those weak sectors.
Top down analysis makes sense. Usually when a trading strategy makes sense it also works well. A rising tide lifts all boats. If the market is rising, that means most stocks will also rise. If the market is falling, that means that most sectors and stocks will fall. The same idea is also present in each of the sectors - if the sector is trending upward or downwards this means that a majority of stocks in that sector also rise and fall together with it.
There will always be some crazy stock that goes completely against everything else, but if you try to find those and trade those you will probably not be very successful. For most of us the key to successful trading is to easily identify trades that are likely to move in your favor. The great majority of stocks will move together in tandem with their sector. And the sectors will move together with the market as a whole. The easiest way to find great trades is to identify the low hanging fruits. To identify the stocks that move with their sector and with the market.
This is an approach that all the big players in the market use. From JP Morgan and the likes, to professional and individual traders. It has been used successfully for probably a century already. I personally found this method when completing a stock market training course that was created in 1933. I have then refined the method over the years, and finally developed a tool that I use every day in my own trading at a US proprietary trading firm. Now this tool is available to you also.
Once we have determined the market outlook, we will go on to find the strongest or weakest sector, and finally find the strongest stocks in that strongest sector. Or find the weakest stocks in the weakest sector. Depending on if the market is bullish or bearish.
In a bullish market we will only trade long positions, i.e. buy stocks. In a bearish market on the other hand we will want to sell stocks short. We always want to buy stocks in strong sectors, or sell stocks short that are in weak sectors.
Out of those stocks that we find in our analysis, we will finally select those stocks that are in a break out pattern with high likelihood of a profitable trade. Here is where the point and figure method comes in. Point and Figure offer high probability trading signals that are perfect for our trading strategy.
Point and Figure method will also show you where to place your stop loss orders, and provides ideas on when to take profits.
So this is what the general process for profitable swing trading looks like. It is very simple and makes perfect sense. Now you can access the simple tools that allow us to do this analysis quickly and easily. We have the online point and figure charts platform where we log in and right on the first page we see the market outlook, then we can move to find the strongest sectors and finally identify the strongest stocks. Out of those stocks we can immediately scan for trading signals. You could also stop and only trade the sectors, using ETF’s. There are many traders who trade sector ETF’s or options on those sectors. Our tools also provides trading signals for ETF’s.
That is how easy and simple this top-down method is done with the right tools. It takes a few seconds to see the market direction and outlook, and another second to find the best sectors, and then find the stocks in that sector. This entire process takes one minute at a maximum. You can then spend some more time on analyzing the charts and you will be able to pick the very best stocks to trade. You can trade these stocks comfortably and confidently.