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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
