What is a Bottom Up strategy ? (Definition)

Also known as "Stock Picking" or "Bottom Up Method", the Bottom Up strategy focuses on analyzing the overall health of a company in order to evaluate the potential of its stocks.  

The Bottom Up strategy, a selective view of the market

Popular with famous trading personalities such as Warren Buffet or Peter Lynch, the Bottom Up strategy - also known as "Stock Picking" or "Bottom Up Method" - implies that the investor takes the stock itself as the starting point for his analysis. In other words, in the first instance, the Bottom Up trader does not take into account the dynamics or location of the market, unlike with the Top Down strategy. Instead, they will rely on a thorough analysis of the accounting, economics and strategy supported by the company that owns the asset.

The Bottom Up strategy therefore requires a thorough knowledge of the company's current situation, its dynamics and its potential, in order to determine whether the company's value is undervalued in relation to the market. Annual reports, letters to shareholders, articles in the trade press... everything is taken into account.

It should be noted that despite the importance of the financial and fundamental analysis of the company, the decision making remains as always subjective and the part of psychology remains not negligible, beyond the objective value of a stock. The Stock Picking method requires a good knowledge of management, accounting, finance and economics. For these reasons, patience and method are a must to hope to succeed with this approach. Many traders therefore fall back on Top Down strategy or technical analysis.

What is a Double Top ? (Definition)

A double top consists of two peaks formed in contact with resistance. This chartist pattern signals a probable reversal of an uptrend.  

The Double Top, a bearish reversal figure

A chartist figure present in certain trend reversals, the Double Top is characterized by :

• The formation of an "M" on the price history (sometimes it forms a "MN", or "Triple Top")
• The existence of a previous uptrend and the reversal of this trend (which thus becomes bearish) after the Double Top 
• The breaking of the "Neck Line" (term explained below).

Chronologically, the Double Top respects 7 key steps :

• Prior existence of an upward trend 
• Formation of a first high point (sign of a confrontation between buyers and sellers) 
• Reversal of the trend (which becomes bearish) up to the Neck Line, i.e. up to the low located between the two peaks of the Double Top 
• Temporary resumption of the uptrend until the last high point reached (without managing to exceed this resistance level)
• Bearish recovery whose potential is then proportional to the initial upward trend (1) 
• "Pullback to the Neck Line (buyers attempt to turn the trend up again)
• Two scenarios are then possible: either the pullback is successful and the chartist pattern becomes a Triple Top, or the pullback is unsuccessful, and the break of the Neck Line validates the Double Top pattern.

Depending on the case, the Double Top pattern allows for a wider or narrower gap between the two tops. The narrower the gap, the greater the probability of a downward reversal of the trend, and therefore of validation of the Double Top. Similarly, the peaks may take the form of a peak (Adam's peak) or, on the contrary, a rounded shape (Eve's peak).