How a Top Down Trading Approach Improves Your Trading Consistency

[Music] Welcome aspiring traders to the Learn to Swing Trade the Stock Market Podcast, where we focus on unraveling the mysteries of the stock market and guide you on the path to consistent and profitable trading. I'm your host Brian Montez, the trader and founder of the Displendrator Academy. So we are going to focus on this podcast to help de-missify the complexities of the stock market for beginners and experienced traders as well. From understanding the fundamental principles to mastering the art of swing trading, our goal is to equip you with the insights you need to navigate the market with confidence. We will explore topics that matter to new traders from decoding market trends to developing disparate trading strategies, expect practical tips, expert interviews, and real-life stories that shed light on the intricacies of the stock market. Swing trading is an art that balances precision and discipline. It's about understanding the market dynamics, making informed decisions, and most importantly, building a strategy that suits your style. So if you're ready to embark on a learning journey that can transform your trading game, you're in the right place. Subscribe, buckle up, and let's dive into the world of swing trading together. Welcome back to another episode of the Learn to Swing Trade the Stock Market Podcast. I am your host Brian Montez, and co-founder of the Dispuntrator Academy. All right, this week we are going to talk about top-down trading strategy and how does that fit into your trading plan. So if you are developing your own strategy for swing trading the stock market, one of the ways that you can increase your odds consistently trading profitably is to implement a top-down trading strategy. And that's what we're going to go over today is what is a top-down trading strategy, what are the characteristics of it, and how does it help your trading. So with that, let's get into top-down trading strategies and let's unravel this and explore how we can use it to enhance your trading game. All right, so the first thing is what is a top-down trading strategy? So let's start by defining this and how it differs from other trading approaches. Because at its core, a top-down trading strategy involves analyzing the market from a macro perspective down to the individual stocks. It's like peeling an onion. You start with the big picture and you gradually zoom into specific opportunities. So you're going very, very large coming down very, very small grain or something almost like an upside-down funnel if you will. Or what is it, the old food pyramid when we were kids, right? So we start very wide and we drill down to a very narrow scope. So with that, what we're doing is we're looking at the market as a whole, right? That's the top of the funnel. That's the top of the outside of the onion, whatever analogy you want to use for that. So you're looking at the market as a whole, because while there's certainly opportunities to short stocks in a bull market, it's a lot harder, right? And until you're a season trader, you may find yourself getting stopped out on shorts and losing money on shorts when the market is going up, right? You're fighting the trend. Now, a lot of people are able to successfully short the market or short individual stocks when the market is going up, but usually they're very seasoned in experienced traders. So in the beginning, trying to do that, all that does is add stress stress to what you're trying to do. So the first layer of a top-down trading strategy is your macro analysis, right? And this includes studying economic indicators such as GDP, inflation, unemployment rates, and what the market itself is doing, right? Because when you're looking at inflation and unemployment rates, these are the economic indicators that can move the market one way or another. So we want to be aware of those news-related events to determine whether or not we want to start moving into cash before those events are announced or whether we want to minimize our positions, take some profit off the table, right? We've got to know what's going on economically with the economic indicators to make good decisions about when to enter and exit the market. And right, and there's always things that are happening. So if you sit around and wait for no economic news, then we'll never be in the market. But knowing which economic news factors or news events tend to move the market, have a chance of moving the market greater than others is very, very important. So if you start to understand the broader economic landscape, you as a trader can start to anticipate market trends and identify potential opportunities. And again, we can only anticipate so much, right? Last week, the numbers for inflation were released for January and inflation came in hotter than hotter than expected, right? And you're recording this podcast on February 17, 2024. So CPI came out last week and the market absolutely did not like the hot inflation numbers coming in. And if we were down a couple of hundred points that day, and the S&P was down well over a hundred points and it ended up recovering still down, but we saw a big sell off after CPI was announced on Tuesday because the market didn't like how hot those numbers were. So you know, you have to understand which economic news pieces can really impact your trading. From there, going down in the, you know, peeling this onion back, the next layer is going to be the sector analysis, right? So as we move down the layers, we come to sector analysis. So different sectors within the market performed differently based on economic conditions. So you as a trader need to be able to start identifying which sectors, you know, what the sectors are and where is their strength or weakness within those sectors so that you can incorporate that into your overall trading strategy. One of the best ways to get sector information is FinViz. It's free. They do have a paid account, but I still use the free version. So on FinViz, you can get a snapshot and a heat map of sectors during the market being open and after market hours. So it's great to get heat maps of the sectors. So you'll want to take a look at sector analysis as a second layer of your top down trading strategy because really with the top down trading strategy, what you're looking to do is make sure that your trade is in line with the overall market, right? So if the market is trending in an up direction, you're probably going to want to trade long. But what you also want to look at is is the sector I'm in also participating in and up market, right? So if you want to trade healthcare, but healthcare, maybe the entire healthcare sector is down while the rest of the market is green, you know, you will want to consider maybe not trading healthcare or reconsidering, you know, making a making a long position in healthcare. So the market as a whole might be rising, but not every sector will be participating in that rise, right? What we've seen recently is all of the market has continued to grind higher. Participation has not been across the board. Participation has not been across small caps mid and large, right? Again, driving a lot of this grinding up in the market has been the tech sector, right? The nevitia stock, right? The AI plays. You know, those are, there's just a few stocks that have such a large market cap that they're continuing to grind the market higher. And Apple actually is not one of those right now, right? Apple used to drive the market and it's it's apples not. It's it's been sitting around 183, 184, especially since Warren Buffett recently sold a lot of his shares. So it's the nevitias and Microsoft's and metas that are continuing to grind this market higher right now. But when you look at the heat maps, right? The rising of the market and right now in the January, February, 2024 era, is being done by a limited basket of stocks, not broad participation. So you really do want to look at your sectors to see is the sector that I'm going to trade in is a stock that I'm going to trade that's in the sector participating. Then from there, you also want to, you know, the next layer down is the subsectors, right? So you have the sector of each and out, right? You have technology, communication services, consumer, defensive, healthcare, financial. And then from there, you've got what we call subsectors, right? So under communication services, you have telecom entertainment, you know, you've got subsectors in communication services. So you'll also want to take a look real quick at your subsectors, right? Armite is to say I want to trade Disney Disney's in the entertainment subsector of communication services. So if I want to trade Disney and go long on Disney, I'm looking at communication services. Okay, great communication services trending up, right? The sector is for the most part green my heat map tells me it's green showing me its green I should say now entertainment. How is that participating? The Netflix, the Disney's, the Warner's. How are all those participating in the sector? And if the entertainment is also participating and heading in the upward direction, then, you know, you are, you are, you know, starting now to follow a top-down trading strategy because your sector and your subsectors are all participating in a bull market or market that is rising. And then from there, as you continue to peel back that onion, you get to the actual stock selection itself. So if you're trading individual equity and not an ETF, then you get down to that stock, you do your technical analysis, you look for the pattern that you're looking for, you look for, you know, however you're doing your charting and your technical analysis and then determining whether or not you like to set up the technical analysis of that particular stock. And if you do, then you may have a potential trade opportunity. So that's the That's the foundation to understanding the macro analysis on a top-down trading strategy. Now, let's talk about the benefits of a top-down trading approach. So first, it's going to provide you with a holistic view of the market landscape, and it's going to enable you as a trader to make more informed decisions. Secondly, it's going to help you manage risks because you'll be able to identify potential market shifts early when you look at all of those sectors and macro data. And finally, it's adaptable. It's going to allow you to adjust your strategies based on changing market conditions. So those are three of your benefits to having a top-down trading approach. So how do you, as a brand new trader, implement a top-down trading strategy? Well, it is going to require you to study the market. You're going to need to do research and analysis at each layer. You're going to have to look at each layer every single day when you're doing your chart review. And you as a trader will need to set your criteria for each layer to filter through potential trade opportunities. And then once your trade analysis is complete, and you decide you like to trade, then you have a possible trade setup. And really, what you're doing is that you're, as you go through your top-down analysis, you're looking for alignment. You want to make sure that there's alignment between the top, the outside of that onion right, the sectors, the economic news, the sub-sectors, the chart analysis. You want to make sure there's alignment between the stock you want to trade and the overall market trend. Because this will help increase the odds of a trade going in the right direction for you. So again, top-down trading strategy. This is how it can help you become a better trader or improve your trading when you incorporate it as part of your overall trading strategy and philosophy. So I definitely hope you have learned something on this particular episode. If you work to master a top-down trading strategy, it will take you some time and will take some practice. But the rewards, in my opinion, are well worth the effort. Because by analyzing the market from a macro perspective, down to individual stocks, you as a trader will make a better informed decision and you will increase your chances of success. Well, I hope you've enjoyed this episode. If you have, would love for you to like and subscribe. We do record and drop a, at least one episode every week. And if you are looking for more coaching and education on building your own swing trading system for the stock market, check us out at the Discipline Trader Academy. We do have a community for coaching and education. And if you're not ready for that yet and you're just looking for a smaller community to join, check out the free Facebook group Discipline Traders Academy on Facebook and we'll be happy to, happy to have you join us. So with that being said, I hope you enjoyed this podcast. If you did, like I said, like and subscribe to us. And if you know somebody that can benefit from this episode, do them a favor. Grab a link to the show, text it over them and say, "Hey, I just listened to this episode on how to, how to, I just listened to this episode on how a top-down trading strategy could help us as traders. It would be great if you listened to it. I think it will help you." The more you share this podcast, the more brand new traders we can help build their own swing trading strategy. Alright, till next week, live to trade another day, live to trade another week, live to trade another year. We'll see you next week.