Hi! I'm quite new to trading and this might sound like a stupid question but I will take my chances! When you are swing trader or position trader (or any kind of trader except day trader) do you prefer top-down or bottom-up approach? Imaginary example: I have found an excellent long candidate. Stock just breaked out from five weeks trading range with high volume, then pulled back and now is starting to shoot higher again. BUT when you look the index, it is pointing down and all the signals are saying --> wait. What should you do? Is it better to first analyze the index and if it says buy, only then analyze individual stocks for long candidates? OR do you take that long and forget about that index?
It depends where your edge originates from. What you are asking is like me asking you do you like a light cyan. A light cyan what? nitro
Although Nitro's comment is vague, it is true. By "edge", a few pages could be written on this but, one version of definition could mean, simply, what you have found that works with frequency. If your edge requires that the index that the stock is in is moving in the same direction, then so be it. If you edge requires certain conditions in a stock that work no matter what the index is doing then so be it. For example, my daytrading edge in the YM for scalps, requires certain conditoins in the YM at that moment regardless of what ES, ZN, MSFT or Al Queda are doing. However, when I used to Swing Trade stocks, I looked for support/resistance in the stock, in the Index, and some other indicators. Hope this helps.
My experience in strading stocks in all timeframes, from daytrading to long term trend following, is that when I trade against the index, it is like swimming upstream -- a lot of work for little gain. When I trade with the index, it gets a lot easier. I have tried building various timing indicators to make this simple observation part of my methodology, but nothing seems to work as well as judgement.
It is definitely easier to trade in the direction of the index trend, since the majority of the stocks in the index universe will follow the overall direction of the index. However, if a particular stock has a strong countertrend move with the index, usually due to some surprising news, that particular stock will usually get stronger in the countertrend direction throughout the trading day. In conclusion, it is best to trade the majority of equities in the overall direction of the major indexes. But, if a particular stock is experiencing some surprising news event, an index countertrend trade can be very profitable. Comes with experience to know where the trading opportunities are and where they are not. Charles