Top down & bottom up

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When we trade the forex markets, we are always looking for the optimal moment to enter our positions. At the end of the day, trading is all about timing. If we mistime our trade then we can miss out on potential profits, or worse, we can take a loss.

The best way to ensure our trades have the best chance of being timed correctly is to conduct top-down or bottom-up analysis.

They are both relatively simple concepts, however, you must make sure that you apply these strategies to the majority of your trades if you wish to have the best chance of success.

Here’s how each one works.

What is top-down analysis?

Top-down analysis is a trading style where you start your analysis from the larger time frames “the top”.

When you are looking for trade setups, you will be looking at the higher time frames, such as the daily or even the weekly. This gives you a very zoomed out view of the market which allows you analyze it on a macro scale.

Once you have found your ideal set up, you must then zoom in and analysis the next time frame down to make sure that the set up is still valid. Picture it like zooming in with a magnifying glass to confirm your initial theory.

As we mentioned in the last unit, the more confluent reasons you have to enter the trade, the more likely it is your trade will be successful.

If you have found a trade set up on the daily chart and it is still valid to enter on the H4 and H1 then you can enter a position with a higher level of confidence.

Benefits

  • Focus on the bigger picture
  • Less noise when compared to the lower time frames
  • Easier to see the key levels
  • The levels on higher time frames are typically more crucial therefore it is vital that we have an understanding of where they are and how they will likely impact the market when they reach these levels.

What is bottom-up

If you haven’t already guessed it, bottom-up analysis is when we start with our eye on the lower time frames and then work our way up from there.

Let’s say you are scanning the 15 minute time frame chart and you find a great trading set up. Maybe the price is just about to hit a huge support that your analysis has highlighted and you are looking to enter a long position.

Would this be enough information alone to enter a trade? The answer is no, it wouldn’t.

In this case, it would be much better to go one-time frame higher to have a look at the 30-minute chart to see if our trade is still valid. It would be better yet and much safer to go even higher and look at the 1HR and 4HR time frames, too.

The reason why we do this is to make sure that the route is clear for our trade. The smaller time frame may be screaming BUY but on the higher time frames, there could be a huge resistance in the way that could seriously impact your trade.

Remember, the trend is your friend. If you are looking to buy then make sure that the trend on the higher time frames is upwards, too. You’ll be making your life a lot easier if you do.

Benefits

  • Much easier to spot setups on lower time frames
  • Helps to avoid overtrading
  • Ensures that your trades aren’t going to run into problem areas that are contradicting your setups
  • It gives you more confidence and will likely see you maintain a much higher win rate.

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