Top-Down Analysis
Definition
A way of choosing trades that starts with the broad market, narrows to the strongest or weakest sectors, and only then picks individual stocks inside those sectors.
Example
“Using top-down analysis, she skipped every long setup while the Nasdaq kept making lower lows.”
Detailed Explanation
A top-down day trader first asks what the index is doing: trending up, trending down or drifting sideways. Next comes the sector question: which groups are leading or lagging today. Only then does the trader look for stocks in the leading group that line up with the market's direction. The idea is to trade with the market's tailwind rather than against it, since many stocks move with their index and sector during the session. Top-down works best on clear trend days and is weaker on quiet days or for small-cap stocks moving on their own news, where bottom-up analysis usually fits better. Many traders combine the two.
Go Deeper
Related Terms