Bottom Up Investing - Trading Methodology

Bottom Up Investing definition

Bottom-up investing is a trading methodology where the investor ignores happenings in the broad market and bases their investment decision solely on the action of the security.  This approach is the exact opposite of the top-down approach and is more suitable for active traders.

The bottom-up investing approach believes that a some securities can overcome the current macroeconomic factors.  The security's ability to outperform can be a result of a new product release or earnings report that drastically outperforms the security's sector.

Long-term traders will have a tough time trading with the bottom-up approach.   This is because with lengthier investments, the weight of the sector and market at large will ultimately pull down the stock.  Now when it comes to active investing where a trader is in and out of the stock the same day or for a few weeks, the broad market can have little impact on the stock.  This sort of strategy however will require the investor to have researched the stock thoroughly enough to go counter to the trend.

Profile of a Bottom-Up Investor

A bottom-up investor believes that participants in the market do not need to understand the inner workings of the various markets (bonds, currency, etc.) in order to make money in stocks.  These traders feel that trying to understand the various markets will only add to the confusion that's ever present in the stock market.  Bottom-up investors are truly stock pickers and pride themselves on their ability to assess a stock independently of its sector. 

Benefits of Bottom-Up Investing

They are the marines of the trading community because they are always the first to take long positions in bear markets and go against the primary trend.  This allows traders to buy stocks cheap after major corrections in the market.  Whereas top-down investors have to wait until the market has already recovered, thus losing the majority of the gains.

Cons of Bottom-Up Investing

Trading is always much easier when you trade in the direction of the broad market, because even if you are wrong the market will lend a helping hand.  So, even if you select the best stock, the broad market could hold back your winner.  Look at how the current credit crisis has hurt some great technology stocks.
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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