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Stock Market trading. Options Trading Coach teaches you trading skills to profit in bull or bear markets

Stock market top down and bottom up approach to trading stocks or options.

 

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TOP DOWN and/or BOTTOM UP APPROACH

    I favor the Top Down approach over the Bottom Up approach. 
I follow the broad market's trend.  Then I study the sectors moving those markets, and, in turn, which industries are moving those sectors; finally, which stocks in those industries have the best looking chart, setup and reward potential. 
Then again, sometimes I'll stumble on a chart that just has a great setup and I will reverse the process.  This is the Bottom Up approach. 

Finding a Stock with The Top Down Approach

This means that you are searching for a stock but you're going to start at the top of the market, i.e. you're going to look first at the broad market environment where matters of the economy move the markets.  Then you will find the sectors that are moving in that environment and finally which stocks in those sectors are leading the way up or down.

1.   Determine Major Trends...

  • of the broad markets (Dow, S&P, NASDAQ)

  • of sector leadership (up or down) within that market

  • finally, which stocks are in the leadership role (up or 
    down) within that sector. 

2.   Did you use a checklist for the Dow, S&P, NASDAQ?

3.  Did you use a checklist for the sector?

4.  Did you use a checklist for the stock as well as the checklist
for those items away from the stock chart itself
?

5.   Market Environment. Is the market environment suitable 
for such a trade? What time of day is it? What are the market 
gauges telling me?
 

6.  Is there a setup in the chart pattern?

These are essential but basic questions. Naturally there are 
other questions such as when earnings are due and so on. 
Consider this an essential list for
the Top Down approach 
but by no means comprehensive.

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Finding a Stock with The Bottom Up Approach

This means that you are searching for a stock but you're going to start at the bottom of the market.  Usually these are the stocks you either stumble on or are what are referred to as story stocks.  So you're going to look at the stock chart first, then the sector that the stock is in and finally the broad market environment.  Is it trending up or down?  Your thinking here is more of the stock acting independently of the market direction and not so tied to market economics.

1.  Having found a reasonable chart to analyze more closely, determine its trend.

  • Trending up, down or consolidating
  • Is it at a price support or resistance level?
  • Is there a reversal or continuation pattern developed?  If so, is it a mature pattern?  How long has it been in place?   Does your chart fit the pattern?

2.  How is the sector of that stock performing?  Look at the chart on a daily and weekly period.  Is your stock and its sector moving in the same direction?

3.  What about the broad markets?  The Dow, the S&P, the NASDAQ...are they trending in the same direction as your stock and sector?

4.  Any government announcements due that week that could affect your trade?  

5.  Is your stock due to announce earnings within the next week? 

6.   Did you use a checklist for the stock as well as the checklist for those items away from the stock chart itself?

7.  These are essential but basic questions. Naturally there are other questions, such as when are earnings due and so on. Consider this an essential list for the Top Down approach but by no means comprehensive.

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