70 THE CANDLESTICK TRADING BIBLE Time frames and top down analysis 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 one-
time 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.
