4 Crazy Price Action Forex Tips That Will Seriously Improve Your Trading!
2. Top Down Analysis is A Critical Step For Price Action Traders
You might have heard the term ‘top down analysis’ being passed around the Forex communities from time to time. This nicely complements the ‘getting context’ tip above.
Top-down analysis is the idea of aligning what’s going on in the market from a higher time frame perspective (top), and then stacking it with your trading time frame analysis(down) – to create strong synergy with your trade idea.
This is a critical, and an overlooked step when evaluating a trade idea by many traders who are trying to learn price action.
To begin, start your analysis from the top time frame – I recommend using the weekly chart for your entry point.
The weekly chart offers a lot of value, big technical details that you might otherwise miss on your trading time frame. I mostly use the top time frame (weekly chart) for gathering information.
I am looking for information such as:
Critical support and resistance levels: Levels which have proven to act as a major turning point in the market before.
Dominant technical features: Major trend line structures or price squeezing structures.
The market structure: Which way are we moving/trending? Where are we within a range? Is this a choppy consolidation period?
Previous weekly candle anatomy: Provides good insight to where price is likely to try move.
Then we move down to the trading time frame…
Because I am dominantly a swing trader, that’s anything between the “4 hour” to “Daily” charts. Occasionally I will use the 1 hour chart for an aggressive swing trade entry, but only when I can build very strong top down analysis.
When you’re on your primary trading time frame, it is business as usual – looking for details such as:
Market structures: trending, ranging, etc.
Turning points: trend lines, swing levels, support/resistance or whatever your trading system dictates is a technical feature.
A clear trade signal: usually a candlestick pattern, or some kind of price action event.
To illustrate why this is important, lets walk through an example where we disregard top down analysis and focus only on the trading time frame.
This example is a ‘what can happen’ if you ignore the bigger picture, so we will just check in to see what the higher time frame chart is communicating so I can make my point…
As per usual, I begin on the weekly time frame.