Page 13 - Trading #101 Course – Part One: Trading Basics

TRADING #101 COURSE – PART ONE: TRADING BASICS /2017-10-06

You can use this approach by looking for sectors that have been sleepy for a while.
Then look at the sleepiest stock groups within that sector. Then, choose the best or
longest sleeping individual stock in that group and use your trading rules 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 a reversal signal and find the best group in the sector.
Finally, identify the best individual stock that has also formed the pattern you are looking
for.

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 in 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 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 down trending sector or group. It is possible that they have
sold their positions already.

This is why the 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

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