Introduction
It is often said that Trading is the 80% waiting and 20% finding the best opportunities. It means a trader should mostly wait for the best and high probability trade setups. The best trades don’t come around every day. That’s why traders filter out the low-probability trades using confluences and focus only on high-probability trades to keep growing capital.
One of the best ways to filter out the high probability trades is the high timeframe analysis. I also always do a higher timeframe analysis before entering a trade Opportunity.
One thing that I like most about higher timeframes is their simplicity. it’s very easy to judge the trend based on higher timeframe candlesticks. Finding the trend direction on a higher timeframe and then finding trade setups in that direction on lower timeframes will increase the winning probability.
In this article, I will teach you the top-down approach that can be used in strat trading. In the next upcoming post, I will explain the timeframe continuity.
Identifying trends on a higher timeframe
In strat trading, we use the combination of three scenarios to forecast the market. We will use the strat patterns on a higher timeframe to determine the trend and price target.
There are many strat patterns; however, we will mostly use the 2-2 continuation in determining the trend. However, if you want to stay more conservative, then you can use other patterns like 3-1-2 reversal, 2-1-2 reversal, 3-2-2 reversal, etc
let me explain to you with an example.
Below is the image of TSLA Tesla stock, and the timeframe is daily.
you can see that there is a 2-2 Bullish continuation forming on the daily timeframe of Tesla stock. It means that the trend is bullish on a higher timeframe.
Actually, it’s not a lagging parameter. A 2-2 bullish continuation pattern is confirmed just after the break of the previous bullish candlestick.
For example, you are seeing a bullish candlestick, and when the next candlestick will just break the high of the previous candlestick, then a 2-2 bullish continuation pattern will be confirmed. you should not wait for the second candlestick closing to determine this pattern. In the same way, we trade other strat patterns. The last candlestick is decisive, and we have to trade that candlestick.
i hope the graphical image will clear the confusion of trading the strat patterns.
Forecast range
if you are using other strat patterns like 3-1-2, then you will get a forecast range. I mean you will come to know the entry and take profit levels. However, we are not going to open trades on daily timeframe strat patterns directly because we are intraday or swing traders.
so what’s the benefit of this?
When we come to know the price range between the entry and take profit price, then we can trade that range on a lower timeframe with peace of mind.
For example, the daily timeframe range will be much bigger, so we can get very high-risk reward trades on lower timeframes.
Confirming trend on lower timeframes
After forecasting the price range on a higher timeframe, then the next step is to switch to lower timeframes. For daily higher timeframes, you can use H1, 30M, and 15M timeframes.
For example, if the forecasted price range on the daily timeframe for TESLA stock is $230 to $270. then, on short timeframes, you will have to find bullish reversal or bullish continuation strat patterns.
Keep in mind that you must skip any bearish trade setup. because we will have to align the trade with the higher timeframe trend.
We can keep on trading bullish strat patterns along with holding trades until the price reaches $270.
This higher timeframe approach will provide high-winning and high-risk reward trade setups.
Strat trading strategy
On the lower timeframes, you should open long trades on bullish strat patterns, but keep in mind that you must stay strict to the strat trading principles.
I mean, you should also exit a profitable position if necessary according to strat patterns rules.
The bottom line
Trading is all about probability. We can stay on the winning side by increasing the winning probability of trade setups. I have explained the simplest way, and that is a top-down approach in the strat trading.
In the next lesson, I will explain the timeframe continuity that is a very important part of the strategy.
I highly recommend you backtest the top-down approach strategy and then analyze it.
if you have any questions regarding a higher timeframe or lower timeframe, then please comment below.
Thanks