Top-Down technical analysis is the process of approaching analysis from a wider lends, and then progressively "zoom in" to a more narrow view.
In fundamental analysis, this is the process of starting with global analysis, macro-trends, sectors, and then finally individual stocks. This is an excellent way to find tickers to track - keeping in mind sector rotation, and finding “hot stocks” to look deeper into.
For our purposes with Technical Analysis, it’s the process of starting analysis on a chart with a higher timeframe, moving to medium, and then a lower timeframe.
Candles represent the open, high, low, & close of price in a given period of time.
Higher time frames consist of 1 Month, 1 Week, and 1 Day chart.
Medium time frames consist of the 4 Hour, 2 Hour, and 1 Hour chart.
Lastly, lower time frames consist of 12 Minute, 5 Minute, and 2 Minute chart.
We start with the higher time frames to get a feel for the overall strength of the underlying stock/index we are looking at.
This is also where we can establish significant levels of support & resistance, channels, trends, high time-frame setups via chart patterns and Fibonacci.
Next, we move on to the medium timeframe - this is where swing traders tend to make their entry. Instead of each candle representing a full day of price action, we can look at that day broken down into multiple candles of 1 hour blocks.
This gives us a better understanding of how the day’s trading took place.
Lastly, we move into a low timeframe for the purpose of finding entries for day trading. This is where we can really zoom in on the day’s price action and seek out the “ideal” high-probability entry point.
Support/resistance, channels and trends are established here for the purpose of day trading, but they tend to not carry over into the following day/week.
