What is Top-Down Analysis?

Top-down analysis is a systematic approach to market analysis that starts from a broad perspective and gradually narrows down to specific trade opportunities. This method helps traders identify the overall market trend before focusing on individual assets.

In fundamental analysis, top-down analysis begins with:

1. Global economic trends – Macroeconomic factors such as interest rates, inflation, and GDP growth.
2. Sector analysis – Identifying strong or weak sectors in the market.
3. Industry & stock selection – Filtering down to specific industries and finally individual stocks.

For technical analysis, the top-down approach involves analyzing price action across different time frames, from higher time frames (long-term trends) to lower time frames (short-term opportunities).

Understanding Time Frames in Technical Analysis

Candlestick charts display price movement over different periods, and each time frame provides unique insights.

1. Higher Time Frames (Long-Term Perspective)

   • Charts Used: 1-Month, 1-Week, 1-Day
   • Purpose: Establishes the overall trend and major support/resistance levels.
   • Key Questions to Ask:
     • Is the stock trending upwards, downwards, or moving sideways?
     • Is it trading at all-time highs, all-time lows, or within a historical range?
     • Are there any significant chart patterns, such as head and shoulders, double tops, or bullish flags?

   <aside> 🤔 Example:

   If a stock is in an uptrend on the 1-week chart, it indicates strong bullish momentum. This tells us that bullish setups on lower time frames are more likely to succeed.

   </aside>

1. Medium Time Frames (Swing Trading Perspective)

   • Charts Used: 4-Hour, 2-Hour, 1-Hour
   • Purpose: Provides a zoomed-in look at recent price action and helps swing traders identify entry and exit points.
   • Key Questions to Ask:
     • How did the stock move throughout the last few days?
     • Are there clear support and resistance levels forming?
     • Is there a trend continuation or reversal pattern forming?

   <aside> 🤔 Example:

   If a stock is trending higher on the daily chart but experiencing pullbacks on the 4-hour chart, swing traders may look for buying opportunities near support levels.

   </aside>

1. Lower Time Frames (Day Trading Perspective)

   • Charts Used: 15-Minute, 5-Minute, 1-Minute
   • Purpose: Helps day traders find precise entry and exit points for intraday trades.
   • Key Questions to Ask:
     • Where are the intraday support and resistance levels?
     • Is there momentum building for a breakout or breakdown?
     • What are the candlestick patterns suggesting about buyer/seller strength?

   <aside> 🤔 Example:

   A trader may use the 5-minute chart to spot a bullish breakout above a key resistance level identified on the 1-hour chart.

   </aside>

Why is Top-Down Analysis Important?

1. Avoids Trading Against the Trend

   • Traders who only look at lower time frames risk placing trades against the dominant trend.

   <aside> 🤔 Example:

   A stock might look weak on a 5-minute chart, but if it is in an uptrend on the daily chart, short positions may carry more risk.

   </aside>

2. Improves Entry & Exit Timing

   • Combining multiple time frames enhances precision in trade execution.

   <aside> 🤔 Example:

   A stock might look weak on a 5-minute chart, but if it is in an uptrend on the daily chart, short positions may carry more risk.

   </aside>