TOP-DOWN ANALYSIS
a clear cut approach to do top-down analysis
The first and foremost requirement of doing intraday or short-term trading is to ensure that you answer the following
a. What is the trend on the higher time frame chart?
b. What is the direction on the medium time frame chart?
c. What are the locations where potential entries — exits can be made?
If you are able to answer these aspects in a precise manner then over a period of time you will be able to see that you are getting an apt hang of price action trading (may it be demand — supply trading or trading based on smart money concepts)
The main problem due to which traders fail in price action is due to lack of plan and to develop a plan it is necessary to do a top-down analysis. So here is a small attempt to make your work easy
THEME:
Start from an HTF chart → Join all the dots aptly → Keep on refining till the LTF chart
If you are able to do this 👆 successfully you will find out that you are becoming an ace in the subject matter discussed over here. So without further ado let’s begin
Start from Daily or H4 chart👇
If you see this daily chart you will observe the following
a. BOS → Break of Structure of a major swing low
b. Strong High (marked with a white dot) → The reason for calling it a strong high is because that swing high led to the break of a major swing low. So until this strong high is crossed there is no point in looking for longs or we can also analyze in this manner that once this strong high is crossed then long trades can be taken
Now what we can do is move down to the H4 chart for developing more inferences. (It is more suitable to look at the H4 chart on CRYPTO/FOREX PAIRS i.e. if you are trading stocks or indices then whatever is discussed below try to implement the same on the daily chart)
At the first glance, you will be able to observe the following (here the strong high was is discussed above is marked with a green horizontal line)
There are two demand zones that are marked with box rectangular boxes.
Now here is a quick tip to find out valid demand zone
The impulsive move that comes from the zone should be fast and should blast out of it i.e. a demand zone that leads to sluggish price move is less probable
Even though I have developed my bias that I am not going to look for longs until the strong high is crossed then why I am marking out the demand zone. The reason is simple, these zones will act as targets for the short trades
Now glancing further we see that there is an attempt to grab the liquidity from the strong high (see the candle marked with a white dot, it just swept the high and then dumped down). After which there is a break in the structure, so now the work is to find if there is any entry possible for which we need to roll down to the H1 chart
Now when we move down to the H1 chart we find out that the price has not closed below the swing low and instead it has just wicked into it.
The rule here is to look for a candle close below a swing low to call it a break in the structure
As the price has wicked into the level so we need to refine the swing low level because now the structure has shifted a little bit lower. See the below-attached chart you will get a better idea
Once the new structure swing low is refined we get a break in the structure. See the second image. Now we will shift to M15 chart to find out entry levels
Now if you come down to the M15 chart you will find out that there is a supply zone that leads to a break in the structure. So once the price gets rejected from the supply zone, short entries can be done
Potential entries are encircled on the chart for your ready reference
Now here is a quick tip to find out valid supply zone
Supply zone which is above the equal highs and imbalance are more probable. So always make an attempt to find out those supply zones which are engulfed by an area of imbalance.
Let me show one example where there is a supply zone above a liquidity zone in form of equal highs and an imbalance. You need to just observe how the price reacts to such a supply zone
See this 👆 chart were in price was breaking the structure multiple times and side by side it was also setting equal highs. So in such a case look for a supply zone above the liquidity and imbalance, you will find out that such supply zones are highly probable. See the reaction (marked with a circle) of that supply zone
So let me conclude with the answer to the questions which were put up at the beginning. Here the answers are given based on the whole discussion done above
a. What is the trend on the higher time frame chart?
A: Seeing the DAILY/H4 chart it is clear that the instrument is in a downtrend because it is breaking the structure on the down side and there is no attempt to break out the strong high, also the price just swept the strong high which adds to the intention of traders i.e. big hands are looking to SHORT
b. What is the direction on the medium time frame chart?
A: There is a break of structure on the downside even on the H1 chart which adds to time frame confluence.
c. What are the locations where potential entries — exits can be made?
A: Supply Zone above an imbalance area and liquidity which led to break in the structure on M15 or M5 chart
Thus it is the top-down analysis that always helps in getting a better idea about the whole picture because if H4 & H1 are communicating a downtrend then there is no point to buy from the demand zones rather it is more prudent to short from the supply zone.
If you found it interesting and you feel that this article improved your way of doing top-down analysis then show some appreciation either here or on my TWITTER handle
Siddharth Signing Off!
