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Top-down trading

 

A top-down trading method is a trading method that utilizes at least two time frames to perform a technical analysis

of a financial instrument. It is also called multiple time frames or different times frame trading because it uses more than one time frame.

Moreover, a top-down trader always starts the technical analysis from the top
(higher time frame) to the down (lower time frame), hence the name top-down trading.

For example, one starts the technical analysis on the weekly chart, then switches to the four-hour

chart before going to the fifteen-minute chart. In that instance, one is using three different times frame.

Or one starts from the two-hour chart before making a trading decision on the five-minute chart. Now,

one is using two times frame instead of three. In both cases, one starts the technical analysis from a

higher time frame but drops down to a lower time frame.


Generally, top down traders use three time frames.  A long term time frame,
medium and a short term time frame. Indeed, the long term time frame (higher time frame) is for the high probability trading set-up, the medium is for the signal and the short term is to time the entry at a low risk point.

Though, the standard top-down trading uses three time frames, one may use more than three time frames. A better approach will consist of using another higher time frame (above) the set-up time frame (long term trend) to validate the trading set-up. Furthermore, one can also use more than one time frame to gradually prepare for a perfect entry.

The ultimate purpose of a valid top-down trading is to align the long, medium and short term trends in view to participate in a trending market in a timely fashion. In fact the trading signal is when the medium term trend is just about to realign with the long term trend after a divergence (contra-trend).  Similarly, the entry is when the short term trend begins a mini cycle of the long term's at the point where the medium term is about to resume the long term trend.

Example a top-down swing trading

Weekly-4-hour-15M

Example of a top-down day trading

4H, 15M and 3M
Daily- 60M and 10M

Example of a top-down position trading

Quarterly weekly and 4H



Practical Top-down Trading Videos Playlist