This post was inspired by a reader who took the spread betting challenge contained in this post.
Having recently revisited the ‘What is Spread Betting?’ series of posts, I was struck at the inadequacy of trading advice.
Its OK learning the process of placing spread bets on the UK stock market but without practical advice, the next level of learning how to trade cannot be reached.
Before I delve into that advice for the next level, I would urge readers to listen to this podcast. It was my first attempt at a podcast so I apologise for it being a bit dodgy in places. What is important is the 9 psychological traits every trader should avoid bit.
Even more importantly is the trait of wanting to win on every single trade that you make. If you feel this way about trading, then you will lose. You will lose because you will disappoint yourself so much that you will end up giving up and reinforcing the mainstream belief that trading is gambling.
You must accept that it is an impossibility to win on every single trade that you make. This is true even for veteran traders.
Which brings me neatly to how you can reduce the chances of having losing trades.
Top Down Analysis
Put simply, top down analysis refers to the idea that traders need a practical way of using the statistically proven rule that 80% of an individual company’s’ share price is influenced by the main stock market.
Take the FTSE100.
This is the main market for the UK stock Market and is the benchmark I use since I trade UK shares. If I were to trade US shares I would use the S&P500 for my benchmark.
So looking from the ‘top down’, we as traders of the UK stock market need to analyse three segments of the stock market before placing a trade and they are:
- The FTSE 100 – to determine the direction of the stock market as a whole
- The FTSE 350 sectors – to determine which are strong performing sectors
- Individual companies – from strong performing sectors that are in the same direction as the FTSE 100
TOP DOWN ANALYSIS
Take a look at the visual representation of this process to the right.
It places the importance of the direction of the main market at the very top of the analysis.
Next comes the individual sectors of the main market.
And finally the individual companies themselves.
Top down analysis makes you focus on the strongest companies in the strongest sectors that are following the direction of the main market.
I use charts to make this analysis.
If I see that the price chart of the FTSE is rising and that half of the sectors are falling, I will concentrate my analysis on those companies in sectors that are rising because the main market is rising also.
It is a simple enough concept which is why I like using it to trade simply 🙂
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