What is a 'Top-Down Analysis'

Top-down analysis looks at the "big picture" first, and then analyses the details of smaller components. An investor who uses top-down analysis typically begins by analyzing the global economy. They then assess macro trends within economies that they believe have the best opportunities. Sectors that are poised to take advantage of those macro trends are then evaluated. Finally, individual stocks within favorable sectors are selected. Top-down analysis can also be used by technical analysts to get a more comprehensive view of a security’s price action.

BREAKING DOWN 'Top-Down Analysis'

Top-down analysis may be used by a trader who uses technical analysis as part of their trading strategy. A day trader may first analyze daily or weekly charts to determine a security’s longer-term trend as well as its significant support and resistance levels, and then move to a smaller time frame to establish a good entry point. For example, if a security is trending higher on the daily chart, and there is bullish momentum on the hourly chart, a trader who is using top-down analysis could then move to a 15-minute chart and find a good entry point for their long position.

Putting Top-down Analysis Together

  • Global Analysis: Investors can assess the health of the global economy by analyzing the gross domestic product (GDP) of both developed and emerging markets. Investors should also consider a country’s geopolitical risks to ensure it is safe to invest. Strong GDP growth over several years is usually an indication that an economy is performing well. For instance, China’s economy appears to be healthy, growing 6.7% in 2016 and 6.9% in 2017.                                                                                                                                                                       
  • Macro Trend Analysis: Macro trends can be determined by looking at specific areas of a country’s economy that are showing strong signs of growth. For example, the rising middle class in China has led it to become one of the world’s largest importers of food. To analyses macro trends further, investors could look at the specific foods that are getting imported, such as beef and dairy products. (To learn more, see: Cashing in on Macroeconomic Trends.)                                                                                                                                         
  • Sector Analysis: Once investors have identified promising macro trends, they can analyze sectors that are well positioned to take advantage. For example, after determining there is growing demand for beef and dairy foods in China, the investor would analyze the consumer goods sector, specifically the processed and packaged foods, meat products and farm products subsectors.                                                                                                                                                                                                                                                    
  • Stock Analysis: Investors using top-down analysis then look at specific stocks in the subsectors that have the most potential to meet increasing demand for meat and dairy products in China. A mix of fundamental and technical analysis can help decide what stocks to buy. For instance, Investors, might look for stocks in the meat consumer goods subsector that have a market capitalization over $1 billion and have recently crossed above their 200-day moving average.

           (For further reading, see: A Top-Down Approach to Investing.)

  1. Top-Down Investing

    Top-down investing is an approach that involves looking at the ...
  2. Investment Analysis

    Investment analysis involves researching and evaluating securities ...
  3. Global Macro Strategy

    A global macro strategy is a hedge fund strategy that primarily ...
  4. Technical Analysis

    Technical analysis is a trading discipline employed to evaluate ...
  5. Macro Environment

    The macro environment refers to the overall condition of the ...
  6. Position Trader

    A position trader is a style of trader who holds a position for ...
Related Articles
  1. Investing

    A Top-Down Approach to Investing

    Use a global view to determine which stocks belong in your portfolio with the top-down approach.
  2. Investing

    Where Top Down Meets Bottoms Up

    Find the investing "sweet spot" by combining these two styles.
  3. Trading

    Basics Of Technical Analysis

    Learn how chartists analyze the price movements of the market. We'll introduce you to the most important concepts in this approach.
  4. Investing

    Understanding Fundamental Vs. Technical Analysis

    The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental and technical analysis. Learn the core differences in these strategies and ...
  5. Investing

    Macro Funds Struggle, Even With Trump Rally

    Despite expectations of success in the new year, macro funds have struggled to deliver.
  6. Trading

    Trading Multiple Time Frames in FX

    This is often the first - and most costly - level of analysis to be overlooked.
  7. Trading

    Exploring Oscillators and Indicators

    Find out how to use these technical analysis building blocks.
  8. Trading

    Use Price Action Trading Strategy for Results

    Bored by the fixed rules of technical and fundamental analysis? Price action trading allows you to customize your own trading strategy.
  1. What is the best method of analysis for forex trading?

    Learn more about the types of forex analysis used by currency traders such as charting tools, economic indicators and/or ... Read Answer >>
  2. What is the difference between fundamental and technical analysis?

    Fundamental analysis and technical analysis, the major schools of thought when it comes to approaching the markets, are at ... Read Answer >>
  3. Is Technical Analysis a Self-Fulfilling Prophecy?

    Technical analysis seems to be useful, but some say it is simply reinforcing what investors believe. Read Answer >>
  4. What are some of the better types of financial analysis software?

    Discover what features make for good financial analysis software, some popular options and why analysts need to pick the ... Read Answer >>
  5. What is the average profit margin range for a financial services company?

    Learn why a company's profit margin is important in analyzing its worth and how companies within the financial services sector ... Read Answer >>
Trading Center