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Why top down analysis is a very good approach to trading?
According to an article on wallstreetoasis.com, The top-down analysis is a stock selection approach that involves starting the study by looking at macroeconomic factors, such as GDP, inflation rate, employment, trade balances, taxation, interest rates, currency movements, etc., before working the way down to microeconomic factors and single stocks.
This type of analysis identifies the countries with the fastest-growing economies.
For example, if economic growth in Europe is better than in Asia, investors will buy Exchange-traded funds that track specific European countries
Top down analysis is a very good approach to forex, cryptocurrency stocks bonds ETFs and any other financial instrument because
1. it gives you the ability to see the market for what it is and not what it is not i.e. it gives you an overall view of what the market from the higher timeframe.
2. its easier and much more easier to predict the direction of the market to a certain degree of accuracy from the a HTFs because the candles are much more condensed unlike the the LTFs
3. It is also much more easier to draw support and resistance both the major and the minor ones from the higher time frame unlike the lower time frames
4.Top-Down analysis starts with macroeconomic indicators such as GDP, inflation, and political stability before narrowing down to specific sectors or regions for investment decisions.
5. Top-Down analysis helps prevent over-investing and promotes diversification across leading foreign markets.
6. Top-Down investors maintain a global perspective, enabling them to anticipate market trends and events' impact on different economies, which helps them adjust their strategies in response to changing global conditions.
Breaking Down Top-Down Analysis
Let's break down the concept into several components:
1. Gross Domestic Product (GDP)
Usually, the top-down approach starts with comparing the Gross Domestic Product (GDP) of various countries, as it is a good and comprehensive indicator of economic growth.
The investor can narrow its search by taking only countries with constant GDP growth. However, other factors should also be considered.
2. Geopolitical Risks
Investors also consider the political climate of a country before deciding to invest in it.
Political unrest in a country or neighboring countries that impacts its economy exposes investors to risk losses due to stock market volatility. For example, the 2022 Russian invasion of Ukraine has caused stock market volatility across the globe.
The top-down analysis looks for geopolitical stability in a region before investing.
3. Asset Condition Investment
Investors must value assets for the company's economic growth. They should take precautions not to overvalue the concerned assets.
4. Local Currency Climate
A company may be doing well and have fast-paced growth in its local currency but may not perform well after considering the depreciation to convert it into US dollars.
Thus, before parking their funds, an investor must consider the inflation of the concerned economy.
Benefits And Drawbacks Of Top-Down Investments
To understand the analysis better, we need to have a thorough understanding of the good and the bad.
Some of pros of the analysis are:
1. Top-down investing helps to choose a stock and the amount of investment according to the market conditions of the economy. Example, if a stock has solid fundamentals but performs in a bear market, top-down investors will not consider it for investment. On the other hand, if the person had followed the bottom-up approach, they would not have been cautioned about the state of the economy before considering the stock for investment.
It prevents investors from over-investing. In addition, the portfolio will be diversified among all the leading foreign markets. Investors can choose the ideal instrument according to the market and economic conditions.
According to an article on wallstreetoasis.com, The top-down analysis is a stock selection approach that involves starting the study by looking at macroeconomic factors, such as GDP, inflation rate, employment, trade balances, taxation, interest rates, currency movements, etc., before working the way down to microeconomic factors and single stocks.
This type of analysis identifies the countries with the fastest-growing economies.
For example, if economic growth in Europe is better than in Asia, investors will buy Exchange-traded funds that track specific European countries
Top down analysis is a very good approach to forex, cryptocurrency stocks bonds ETFs and any other financial instrument because
1. it gives you the ability to see the market for what it is and not what it is not i.e. it gives you an overall view of what the market from the higher timeframe.
2. its easier and much more easier to predict the direction of the market to a certain degree of accuracy from the a HTFs because the candles are much more condensed unlike the the LTFs
3. It is also much more easier to draw support and resistance both the major and the minor ones from the higher time frame unlike the lower time frames
4.Top-Down analysis starts with macroeconomic indicators such as GDP, inflation, and political stability before narrowing down to specific sectors or regions for investment decisions.
5. Top-Down analysis helps prevent over-investing and promotes diversification across leading foreign markets.
6. Top-Down investors maintain a global perspective, enabling them to anticipate market trends and events' impact on different economies, which helps them adjust their strategies in response to changing global conditions.
Breaking Down Top-Down Analysis
Let's break down the concept into several components:
1. Gross Domestic Product (GDP)
Usually, the top-down approach starts with comparing the Gross Domestic Product (GDP) of various countries, as it is a good and comprehensive indicator of economic growth.
The investor can narrow its search by taking only countries with constant GDP growth. However, other factors should also be considered.
2. Geopolitical Risks
Investors also consider the political climate of a country before deciding to invest in it.
Political unrest in a country or neighboring countries that impacts its economy exposes investors to risk losses due to stock market volatility. For example, the 2022 Russian invasion of Ukraine has caused stock market volatility across the globe.
The top-down analysis looks for geopolitical stability in a region before investing.
3. Asset Condition Investment
Investors must value assets for the company's economic growth. They should take precautions not to overvalue the concerned assets.
4. Local Currency Climate
A company may be doing well and have fast-paced growth in its local currency but may not perform well after considering the depreciation to convert it into US dollars.
Thus, before parking their funds, an investor must consider the inflation of the concerned economy.
Benefits And Drawbacks Of Top-Down Investments
To understand the analysis better, we need to have a thorough understanding of the good and the bad.
Some of pros of the analysis are:
1. Top-down investing helps to choose a stock and the amount of investment according to the market conditions of the economy. Example, if a stock has solid fundamentals but performs in a bear market, top-down investors will not consider it for investment. On the other hand, if the person had followed the bottom-up approach, they would not have been cautioned about the state of the economy before considering the stock for investment.
It prevents investors from over-investing. In addition, the portfolio will be diversified among all the leading foreign markets. Investors can choose the ideal instrument according to the market and economic conditions.
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DXYExpect the DXY will pump after retracing to liquidity void at 1 hour :)
tradingview.com/x/0Q7ivOta/
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