As a price action trader, your primary time frame is the 1H, the 4H and the daily.
Price action works on bigger time frames, if you try to trade pin bars or engulfing bars on the 5-minute time frame, you will lose your money, because there is lot of noise on smaller time frames, and the market will generate lot of false signals because of the hard battle between the bears and bulls.
Besides, there is no successful price action trader who focuses on onetime frame to analyze his charts, maybe you have heard of the term top and down analysis which means to begin with bigger time frames to get the big picture, and then you switch to the smaller one to decide whether to buy or to sell the market.
Let’s say you want to trade the 4h chart, you have to look at the weekly chart first, and then the daily chart, if the weekly and the daily charts analysis align with the 4h chart, you can then take your trading decision.
And if you want to trade the 1H chart, you have to look at the daily chart first. This is a critical step to do as a price action trader, because this will help you avoid low probability trading setups, and it will allow you to stay focused on high probability price action signals.
Through our top down analysis, we always start with the bigger time frame, and we look for to gather the following information:
–The most important support and resistance levels: these areas represent turning points in the market, if you can identify them on the weekly chart, you will know what is going to happen when the price approaches these levels on the 4h chart.
So you will decide either to buy, to sell or to ignore the signals you get from the market.
-The market structure: the weekly analysis will help you identify if the market is trending up or down, or it is ranging, or choppy market. In general, you will know what the big investors are doing. And you will try to find a way to follow them on the smaller time frames using my price action strategies.
-The previous candle: the last candle on the weekly chart is important, because it tells us what happens during a week, and it provides us with valuable information about the future market move. When you identify these points using the weekly chart, you can now move to the daily chart or the 4h chart and try to gather information such as:
-The market condition: what the market is doing on the 4h time frame, is it trending up or down, is it ranging, or is it a choppy market.
– what are the most important key levels on the 4h or the daily time frame: this could be support and resistance, supply and demand areas, trend lines….
-price action signal: a candlestick patterns that will provide you with a signal to buy or short the market. This could be a pin bar, an engulfing bar or an inside bar…
Let me give you an example to help you understand why it is important to adopt the top down analysis concept in your trading method and what is going to happen if you don’t look at the bigger time frame before switching to your primary chart.
Look at the illustration below:
As you can see in this weekly chart above, we have gathered two important points that will help us decide what to do on the daily time frame.
The first point is that the market approaches to an important weekly resistance level that will represent a hot point in the market.
The second information is the rejection from this key resistance level, as you can see the price was rejected immediately when it approaches the level, this indicates that there are sellers there and they are willing to short the market.
What confirms our analysis is the formation of the inside bar false breakout patterns that indicates a reversal.
Now let’s switch to the daily time frame to see what is going on in the market:
On the daily chart, we have a clear pin bar candlestick pattern that indicates a bullish signal.
If you focus just on one-time frame to make your trading decision, You will buy the market, because there is a clear pin bar signal. But if you analyzed the weekly chart, you would know that there is a very powerful key level that will stop the market from going up. So, it’s better to think of selling the market if there is a clear signal rather than to buy it.
Look at what happened next:
As you can see, the top down analysis works, the pin bar candlestick signal didn’t work, because the weekly resistance level was a powerful turning point that reversed the market direction.
If you want to trade price action based on one-time frame, i highly recommend you to stop trading because you will end up losing your entire trading account, and you will never become a successful trader.
Trading counter trends is very profitable as well, but without the top down analysis, you will put yourself in troubles.
Let me give you another example to show how you can trade counter trends using your price action trading setups in combination with the top down analysis concept.
As you can see in the chart above, price are at a weekly resistance level, buyers were rejected twice from this level which indicates that the market is at a hot a point and it is likely to reverse.
What you can do as a price action trader is to switch to the daily time frame to look for a selling opportunity.
If you can find a price action setup near the weekly resistance level on the daily time frame, this is going to be a high probability setup to take into consideration.
See the example below:
The daily chart above confirms our weekly analysis, as you can see; there is a clear bearish signal near the weekly resistance level.
The pin bar was rejected from that level, and there is also the formation of an inside bar false breakout.
This is a clear indication of a trend change.
See what happened next:
The example above shows that counter trend works if it is well mastered, it is a contrarian approach that requires experience, so if you are a beginner, i highly recommend you to stick with the trend, try to practice as much as you can the top down analysis concept with the trend, and when you master trading with the trend, you can then move to trade high probability counter trend setups.
There are many approaches used to time the market turns and plan trades, the most of these approaches lead to greater confusion and lack of confidence in the results.
Keeping the analysis simple is most often the best way to go, and top down analysis is one of the easiest approaches that i recommend to master if you want to trade the right way.
What you have to do right now is to open your charts and try to practice what you learnt in this post.
Try to identify the market trend using these techniques. It will be little confusing at the beginning, but with some screen time and practice, you will find it easy to identify the market direction.