Price Analysis – A Top-Down Approach
In a previous article I mentioned that my analysis involves monitoring price action, in order to gain an insight into the short term sentiment of the market. Determining who is in control at that time – the bulls or the bears. And assessing how they’re likely to respond to changes in the market.
I thought today I’d prepare a quick article to give an overview of how I analyze price. Those of you who know me know that I’m a great fan of candlestick charting. However, price analysis is much more than just watching for your favorite candlestick patterns. Too many people just teach the candlestick patterns, which are fine, but in my opinion there’s some essential analysis missing that an astute trade needs to consider BEFORE they look at price action and respond to every candlestick or bar chart pattern.
Let’s have a look at what I mean.
Price analysis for me is essentially a top down approach, working from the macro level of Market Structure (so we analyze the big picture first), then down to the current Trend within that structure, and only then do we look at the current price pattern, whether through candlestick analysis or whatever other method works for you.
So I basically start off with a wide view of the market, and drill down to the detail in the current price bar or pattern.
I prefer to do this over two timeframes.
The market structure is defined primarily on a higher timeframe. For me, as a daytrader, that’s the one hour charts. Of course, if you trade differently to me then that can be any other time period you wish. Just make it higher than the timeframe you trade on – I recommend by at least a factor of four.
Then on the shorter timeframe (what I call the trading timeframe) I refine the market structure a little further, analyze the movement and strength of the trend, and then assess the bullish or bearish sentiment based on the current price patterns.
For me, the trading timeframe’s anywhere from 1 minute to 5 minute charts, depending on the market and its volatility, and how well the price is flowing.
So, what do I mean by market structure, trend analysis and price analysis?
Firstly Market Structure:
• The higher timeframe chart is opened and any areas of major support or resistance are identified and clearly marked on the chart.
• Support
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