Forex Top Down Analysis
In today forex faq, we have a question from one of our fellow traders asking me the below question.
Is trading 1 Hr candle in the direction of the 4Hr candle is enough to generate profits from the market.? Or 1 day candle is a must and ignore 4 hr candle?
It sounds to me that you are actually looking at the 4 hour chart to determine the trend and then zoom down to the hourly chart to look for trading opportunity. This method is what I call the Top Down Analysis Technique.
This is a good technique of trading provided that you have a reliable strategy on hand. Your strategy must have a set of trading conditions to help you check whether the setup is valid or not. In addition, your strategy must have a precise entry indicator as well as exact place to place your stop loss and target profit.
The top down analysis is a general way of trading and if you are planning to enter SHORT trade on the hourly chart when the 4 hour chart is in a strong down trend or enter LONG Trade on the hourly chart when the 4 hour chart is in a strong up trend. You will realize that you will wiped out your account in no time.
This is because the price can still create a big retracement before they continue in its trend. If you were to enter a trade based on the trend on the higher time frame, you will realize that you have more losses that are due to these retracements.
What I suggest you to do is to get a good strategy that can help you to trade the trend. With the strategy, you can choose to only enter a trade in the direction of the trend on the higher time frame. In this manner, you will have a higher probability of winning as the strategy will definitely come with a set of entry conditions, verification conditions and you will learn exactly where to place your stop loss and target profit.
It does not matter whether you use the 4 hourly or the daily chart to look for the overall trend. The key still lies with the strategy that you are using to trade the trend.
However if you want to have a higher probability of winning, you can choose to only enter a trade based on the trend strategy that you are using when both the 4 hourly and daily are showing the same trend.
I hope that I have answered your question and do feel free to email me if you have any problem.