We've all heard the term "Top down analysis" but what are you really supposed to do with it and how do you use it in your favor when picking what trades to take.
Always start your morning off by looking at a monthly chart, this will help show you the over all trend. Be sure to mark the usual spots, open,high, low & close. Also it is beneficial to mark down the range. This will show you how price is moving and at what pace , EX: 5 days into a new month and you see a 100 pt range on the ES monthly chart you can expect there to be a decent amount of pressure in the current direction.
Once done with the Monthly chart work your way down to the weekly,daily,hourly and 15 minute charts. Do the above exercise for each time frame. It is important to also note the direction. EX: is price making HH's/HL's or LL's/LH's.
Once your top down analysis is done it is important that you actually use it! Many times traders will get sucked into looking at a few candles and think the overall trend is gone or not relevant. If the daily, hourly & 15 minute chart are all down and you end up buying due to a large bullish candle on the 1 minute chart you are essentially trying to stop a train by standing in front of it!
Instead look to trade in line with the overall trend. If all your charts are pointing down then wait for a LH ( lower high) to get short. Your chances of placing a winning trade and much higher when you always trade inline with the overall trend. The goal of this to line up as many time frames as possible. You need a minimum of two inline time frames before you take any trades. Many times the 15 & 60 minute chart will signal you into what direction the markets are moving intra-day.
I'm sure by now your saying "well what if we aren't trending " There is really only one correct answer to that, sit on your hands and wait for the proper entry. Many times we see a reversion from the over night price, when this happens you need to look for a minimum of two inline time frames before placing trades.
Lets break down this mornings price action. April 20th , 2020
Above is a Daily chart of the MES ( Micro E-Mini S&P 500 ) , you can see The daily chart is currently down on the day with a large lower wick.
Above is a RTH ( regular trading hours ) Hourly chart, this only prints bars during the US trading session. We can clearly see that price is very bullish. In the first two hours we have basically moved straight up. This signals to us that the Daily Chart is down but the Hourly is up we could be seeing a reversion. Before we take any trades its important that we at least line up one more time frame.
Above is the 15 minute chart we can see price opened up at 2822.75 and has basically move straight up. Now that we have a minimum of two time frames in line we can take any longs "IF" we are signaled in. Even though two time frames are lined up this doesn't mean we should start buying everything, it is important that we wait until signaled in.
Let us know how using a top down approach can help you out!