TOP DOWN ANALYSIS
Look at the bigger picture first
Before we even look at a chart it’s important to figure out the sentiment and fundamentals behind the currency you are looking at; we cover this process and why in the fundamentals section of the course.
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The best way to break down a chart is starting with the highest timeframe and working our way down. So we start with the monthly timeframe. The monthly timeframe gives you a clear idea of where price is moving and what trend we are in.
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Is it looking bullish or bearish? Are we at any key levels or psychological levels?
Starting with the monthly timeframe
We can see patterns instantly. Higher highs/ higher lows or lower lows/lower highs, significant levels of support and resistance and trend lines.
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Remember those trendlines and key levels of support and resistance are more significant on the higher timeframes.
Make notes on your charts to help you build a clear picture of what you think may happen next in the market.
We are looking for candlestick formations, rejection, possible trade setups and if we spot a nice setup we would drop down to a lower timeframe to find a good entry.
As you drop from monthly, to weekly, to daily, to 4 hour and so on, you should identify your edges. Usually when you identify a trade setup on a 4h timeframe you would drop to the 1h to find your best entry. A better entry means more pips, more pips means more money.
So the idea of top down analysis is really simple.
We look at the bigger picture and work our way down.
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Why do we do this?
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-It creates a clear picture for use to trade off
-It enhances our understanding of the currency pair
-It builds more confluences which builds your confidence
-There is less chance of you missing opportunities
-It improves your ability to read price action
EURUSD Monthly and Weekly timeframe
It’s clear to see that even glancing at this timeframe you can see the bear trend is still in full control and we are even breaking lower through our key level of support. From here we would scale into lower timeframes to find the best entries and profit from this downward move.
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SUMMARY:
START ON MONTH CHART AND WORK YOUR WAY DOWN TO M15