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How To Think Like A Trader

As many of you will be aware, there are two basic approaches to stock selection, commonly known as top-down and bottom-up. The former involves looking at big picture economic factors, arriving at a base scenario and then finding trades that will profit when that scenario plays out. The latter is about starting with a company’s fundamental position and assessing whether that individual stock will outperform or underperform the general market. My background in currency and commodity markets makes the top-down approach a more natural one for me to use, but as I have transitioned to more stock plays I have tended to use both, albeit for different purposes.

Over an extended period of time stock markets trend upwards, so investing in solid companies that have growth potential is the obvious long term strategy. Short term considerations specific to the industry involved or the broader economy play a part in the timing of such trades, but the ultimate goal is long term appreciation. That makes a bottom-up approach best suited to investments whose time horizon is to be measured in years rather than weeks or months. Top-down, however, plays more on the cyclical nature of markets and economies, so is better suited to trades designed to be closed out in a relatively short time.

It should be noted that in both cases I am still talking about trades with time horizons measured in weeks and months at a minimum. Intra-day trades where the holding period is even shorter, minutes…




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