you can use to decide what stocks to trade. One is called a topdown
approach, and the other is called a down-up approach. Here are the
differences:
1. Top-down approach:
a. Sector
b. Group
c. Individual
In using this approach, you start the analysis at the sector level
and work your way downward to individual stocks. Traders using this
approach first look at the stock sector charts. Then they analyze the
groups, and then pick the best individual stocks to trade, thus the name
“top-down approach.”
You can use this approach by looking for sectors that have been
sleepy for awhile. Then look at the most sleepy stock groups within
that sector. Then, choose the best or longest-sleeping individual stock
in that group and use the Pyramid Trading Point to enter.
Another way to use this top-down approach would be to look for
the strongest trending sector, up or down. Then wait for an ART Reversal
to form and find the best group in the sector. Finally, identify
the best individual stock that has also formed the pattern you are
looking for.
Maybe you want to look for a strong trend and a pullback, and then
a reversal pattern back in the direction of the trend. Or you may want
to go short off the ART Reversal and trade the correction. There are
different patterns to look for, depending on how you want to trade and
what makes you comfortable.
2. Down-up approach:
a. Individual
b. Group
c. Sector
In this approach you will find the individual stock first and then
analyze the group and finally the sector to see how the stock is behaving
in relation to its peers. This can be helpful when you are getting a
signal to go long on an individual stock, but the volume is a bit low and
you are wondering why.
If you look at the group and it is in a downtrend, and your individual
stock is generating a long position on low volume with no positive
news out, then I might question going long. Again, if it is in play by
either momentum traders or position traders, you will see significant
volume on the time frame you are trading. The more volume, the more
players are participating.
This down-up approach has saved me many times from going into
the market when it is not ready to move. It will show you when the
market is being manipulated on low volume by market makers. Real
trends take “outside paper” coming from off the floor to move prices
significantly.
Many traders worldwide need to be participating for a significant
trend to develop. Significant trends occur when traders from many different
time frames are participating in the trend.
When using the ART top-down or down-up approach, you can get
an idea of who is involved in that stock you are about to trade. If
the sector is not performing well, chances are that long-term investors
are not buying now. They may be holding or waiting to buy, but they
are most likely not buying a downtrending sector or group. It is possible
that they have sold their positions already.
This is why bullish trading swings remain small until sectors turn
around. Without the investor group’s money to add buoyancy to a stock
in a poor sector, smaller short-term traders can then cause these stocks
to sell off more dramatically by shorting the stock, especially if the
significant money is not buying the stock at that time.
By keeping trading techniques and ideas as simple as possible,
you can quickly confirm a trade without getting bogged down with too
much information. When I look at groups or sectors, it does not take
me more than a few minutes and sometimes less to confirm a signal.
It needs to be that quick or you will never use it, especially if you
are trading intraday. You can use intraday charts for groups and sectors,
too, if you have intraday data for them.
If you are a scalper or trading under 10 minutes, it becomes impractical
to view groups and sectors and stay focused on that short
time frame. Activity in groups and sectors probably won’t be of much
help under a 15-minute time frame and is best used for 60-minute, daily,
and weekly charts.
Read More: Using Stock Sectors And Groups For Better Trading
