Forex Top Down Analysis Guide


Forex Top Down Analysis

Forex Top Down Analysis guide


Adopting the Top Down Analysis(TDA) was one of the best things I have learned in my early trading career. Before that, I use to get stuck in the lower time frames (TF) like the 5-15 minutes, kept losing trades and blowing accounts. I am sure that if you have been trading for a while, you know how frustrating that can be.

As traders, we always look to perfect our trading methods and strategies; we try to find what was wrong and fix it. My main issue was that I was looking at the wrong things to fix, and not finding the main reason made me keep jumping from one strategy to another.

Until one day, I stumbled over a trading book that mentioned the significance of the higher time frame — also the importance of using the Top Down Analysis. In this article, I will show you how to approach the market correctly by using the TDA.

Why is it essential to use Top Down Analysis?

One of the most common things you hear when you start to learn to trade is the trend is your friend. Well, that is true until the trend is over. But what trend do they mean? Is it the daily trend or the 15 min time frame? What time frame are they all talking about? Those surely are questions that you asked yourself many times before as a new trader.

TDA will help you understand the market conditions much better; it will also help you to understand in what phase is the market right now. Now, let’s take a look at how to do the right TDA, which will help you get a higher winning rate for sure.

How to make a Top Down Analysis the right way?

The way I do my TDA is to start with a clean chart with no indicators at all. Doing so will filter out the possible conflicting signals from the indicators on the chart, I only want to read the structure on the chart, for that, I only need to see the candles and nothing else is required for now.

  1. It’s done every weekend.
  2. The monthly and weekly charts will give you a good overview of the big picture and the overall trend.
  3. The Daily chart will show you where is the price in the overall trend. Correction? Impulse? Sideways? It is also an excellent TF to draw support and resistance levels.
  4. 1-4H TF is a reasonable TF frame to see what is going on inside the daily chart. In these TF’s, you plan your Trade Entries, and Trade Exits levels.

The monthly chart…

Is always the first chart to look at. Looking at the monthly chart will help you to have an overall view of the significant trend of the market. Here you’ll try to gauge what is the dominant trend, with a more substantial weighting on the latest 6-12 months. So why more weight on the most recent data? Well, if you consider the chart below, you can see that the move to the upside that happened between A and B was a robust bullish trend. A trader during that period would be a buyer on all the dips that occurred since the primary trend was a strong bullish trend.

But what about the leg down between (B) and (C)? If that same trader kept buying that market, he would be losing many trades since the market shifted to a bearish trend. That is why you need to put more weight on the latest data you have; that way, you can still adapt to the ongoing market conditions. So if you look at the whole period from (A) => (B) => (C), you’ll see a bullish market that started a correction at (B). During that correction, you would be seller short term and alarmed about the possibility that the market could begin moving higher after some time, the hard part here is that you can never be sure when that will start. The best solution here is to have small profit targets or to trail your stops above the market structure or any other stops trailing strategy that pleases you.

So what if you would trade this market tomorrow, and you have the full data to the point (F)? So again, let’s take a look at that period and try and understand what the chart is telling us. From the lowest low at (C), this market has been trading sideways with slightly higher lows. After the break-out at (D), you got the confirmation that the primary bullish trend may now continue. The main reason you can consider that is because this is the first time the price was able to break above the resistance at $1368. Now, let’s take a look at even closer data at point (F), the previous three candles (months) showing clear sideways market conditions.

So, what to do here? Are you going to buy the dips to follow the dominant trend, or are you going to try to play the range, selling high, buying low? Again many conflicting ideas start to run amok in your head, making you confused. The answer to all that will be much easier when you go down to the lower time frame, and we will do that soon. For now, let’s have a conclusion about what the monthly chart told us so far:

  • The primary trend is bullish.
  • The midterm condition is a possible trend continuation.
  • The short term conditions sideways.
Forex Top Down Analysis

Forex Top Down Analysis Monthly chart Gold

The weekly chart…

is the time frame that will help you to see what is going on inside the monthly chart. Again, by looking at the most recent data, you can see the bullish move this market did from October 2018 to October 2019. Also, it is easy to say that between point (C) and (F), the trend is bullish. While during this period as well, there were strong bearish moves that would hurt a trader buying the dips. So again, if you were planning to trade this market tomorrow, what is the first data to watch closely? That’s right, the most recent data. This means that one should say, it’s a bullish market that is in a possible short term bearish correction mode.

The reason to say that is, a significant bullish leg has been made from October 2019, and a down move started to happen at point (F) (Correction phase). So far all good, but it’s here as a trader; you have to make an important decision. You either sit on hands waiting for the market to continue in the direction of the primary trend (Bullish) or trading the correction down. Also, in this case, it depends on what type of trader you are. A scalper, trading the 5-15 min time frame will not care much about the primary trend, and will only focus on the daily time frame and lower. While a swing and position trader will surely consider the weekly time frame.

 Gold Top Down Analysis Weekly Chart

The Daily Chart

This is the time frame that you will use to draw most of your support/resistance levels and trendlines. We keep working with the same market here, pretending that you want to trade this market tomorrow. The most recent data is showing us a bearish move; you have significant lower highs and lower lows. So your near term trend is bearish; when you look left, you can also see the market did break below some major swing lows as well. Even though the primary trend is bullish, you do have a bearish trade opportunity. The price level at $1480 has been acting as strong support, but lately, you can see that it got broken to the downside. Therefore you should look to short this market on the retest of the broken structure at $1480, anticipating bearish continuation (Short term).

So, as you see, from a bullish market on the monthly chart, to a sideways and bearish on the weekly and daily time frames. A trader needs to keep an eye on all time frames to be able to distinguish what the chart is really saying.


Planing Trade Entry Using Top Down Analysis Gold

Planing Trade Entry Using Top Down Analysis

The 240 Minutes Chart (4H)

After looking at the daily chart, you saw a significant break of support. Now when you look at the 4H chart, you can also see why I am calling that $1480 level as a substantial support structure that got broken down. What makes it a significant level is the number of times the price got rejected or bounced at that level, five times in this case. You also had one fake-out, where prices pushed lower for a short time to then move back up. Now, the last breakout you see on the chart is far more notable than the previous one. That is the main reason why you should be looking to short the market.

But even here on the 4H time frame, what is the most recent data telling you? Well, it is bearish since it broke vital support, but at the moment, it is making a bullish correction or a bullish continuation. I hope you still following and not got too confused, but really, there’s no way to tell for sure if the latest move on the 4H TF is only a correction up or a bullish continuation.

What could help you in this case, and the reason you should be looking to go short is the daily time frame. On the daily chart, you could see a strong bearish momentum (Big bearish candles) and som significant swings with lower highs and lower lows. Supported by that daily chart view, you can decide to go short on the 4H or the 1H time frames. So now, it is all about looking for the right triggers. Before you do that, let’s take a look at the 1H chart and see if you can find some more evidence to help you.

Planing Trade Entry Using Top Down Analysis

Planing Trade Entry Using Top Down Analysis

The one hour chart (1H)

By considering the 1H chart below, you can see that the market has been in a sideways mode, to start then a robust bearish trend breaking the critical support at $1480. As shown in the 4H chart above, the most recent data showed the market moving higher. Also, on the 1H, you can observe that bullish move. But what about the most recent data here? Here’s where it gets tricky again and where you, as a trader, have to make a decision. The reason for that is the latest strong down impulse on the chart. Is that the beginning of the bearish continuation? Do you trade that, or wait for the market to reach your planned level at $1480? There is no one answer here; every trader has to make their own decision in such a scenario.

My advice to a new trader would always be to wait for the market to reach your pre-planned level of high value. While a more seasoned trader would trade this last leg as a possible bearish flag and play the flag pattern strategy here. What flag? Let’s take a look at the 15-minute chart…

The 15-minute chart

On the 15-minute chart, there is no clear direction. The market is sideways, while there are short trends that appear from time to time. Again, the most recent data is a strong bearish move followed by a correction. Here you can easily identify the bearish flag I mentioned earlier. The pole of the flag, which is the bearish impulse that started from the top. The bullish correction is bounded by two parallel trend lines forming the flag.

So, is the 15-minute chart telling you if the bearish trend on the 1-4H chart will continue? That could be the case, but it is not a must. What I am trying to show you here is that for every trader in the market, there will be reasons to both go long and short at the same time. You, as a trader, have to decide on what time frame you want to trade.

Planing Trade Entry Using Top Down Analysis

Planing Trade Entry Using Top Down Analysis

Forex Top Down Analysis Conclusion:

Doing a Top Down Analysis is essential for you as a trader, it will help you get a higher winning rate. Each weekend make your TDA on all the markets you trade. Starting on the monthly and weekly charts to get the overall view of the market. Then you go down to the daily chart, to be able to see in detail what is going on inside the monthly and weekly charts. Also on the daily chart, you draw your support and resistance levels as well as possible trendlines. Next, you go down to the 4H TF to see the structure inside the daily TF. On this time frame, swing-traders would plan their entry, SL and TP profit levels.

A day trader would need to go to a lower TF as the 15min-1H TF, that is where they would plan trades and using the 4H as their higher TF chart to draw support and resistance levels at. This article is only to show you how to make your Top Down Analysis, so I did not cover other things as support and resistance, etc. Those are topics that will need their own articles and will surely cover them in the futures so stay tuned.

To learn more about my Forex Top Down Analysis approach, you can subscribe to my YouTube Channel. I do upload a new video each week, with a full TDA on all the majors. It’s very appreciated by many traders, the videos will help you plan your trading week.

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Images made with TradingView


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