Bottom-Up Analysis

Yesterday we spoke about the top-down analysis approach in creating a trade idea. The other side of the top-down approach is the bottom-up approach. This means taking an instrument and building up the trade idea from the instrument and analyzing the fundamentals to see if it is a viable trade.

This approach is microeconomic specific and requires detailed fundamental analysis to see if it is the correct moment to trade, which direction to trade or if you should even trade the asset. Once you have determined the above then you start taking into account the macro-economic affects on the instrument to determine entry or exit on a trade.

To give an example, if you want to trade oil you would take into account all the relevant fundamentals, news information and market events that would influence the supply or demand of oil and trade based on those factors. Or, as Anton Kriel once showed in a series, if you love a specific product like Adidas then you will always want to hear about the product and its developments and influences and you will be in a great position to trade a product that you have a passion for which, in turn, can only assist in making your trading successful.

As I always mention, a complete portfolio always requires a balance and it does not matter which approach you take, top-down or bottom-up, in both you will need to incorporate macro and microeconomic analysis to be able to produce a successful investment portfolio.

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