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Hello, guys, and welcome to the first lecture in Section 3.
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In this lecture, I will introduce you to the top-down approach, which I use in my trading to get
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a more comprehensive view of a security's price action by narrowing down from larger timeframes to
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smaller timeframes.
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This approach allows me to establish the key support and resistance levels in the past, which provide
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me an edge over those who are only looking at single timeframes for trade entries and exits. By using
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the top-down analysis in this strategy, I am anticipating that major support or resistance levels from
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the past will act as price points, where security will either enter the sideways or consolidation phase
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before the price continues advancing in the direction of the previous trend or it reverses.
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Therefore, these levels present a perfect trading opportunity in near future once
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the consolidation phase ends. Later on,
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in this course, I will also teach you how these support and resistance levels, when combined with
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volumes and candlestick patterns, present timely trade entries and exits.
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In the examples discussed later in this section, you will learn how support from the past becomes resistance
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as we move from left to right on your trading chart. Before we proceed,
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there are few key guidelines which I want you to understand here
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while labeling the support and resistance levels on any freely traded market.
1. Draw the most obvious support
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and resistance levels.
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That is, if it is not obvious support and resistance, it is not very significant.
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So, guys, these major support and resistance levels are clearly visible and I do not want you to stress
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too much while plotting these levels.
2. Build up from larger timeframes and look for opportunities on
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smaller timeframes.
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Therefore, I recommend using monthly and weekly charts for establishing major support and resistance
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levels and then use daily and f4-hour charts for trading opportunities.
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As we discussed in the last lecture, use weekly charts when there is very small amount of past price
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data available on monthly charts.
3. Larger the consolidation phase, the more dramatic the resulting
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price action will be. To explain this guideline,
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the Law of Cause and Effect by Richard Wyckoff is a perfect example.
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A security will reflect the strength of an extended consolidation phase in the resulting price action.
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Therefore, it is worthwhile studying these extended sideways price movements to capture the larger
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move, which occurs once a consolidation phase ends. Plot support and assistance zones
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instead of using single lines while plotting key support and resistance areas.
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You need to understand that price is very dynamic due to momentum and volatility factors.
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Due to this, retail traders often see price spike through their support and resistance lines before
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it returns back to the actual level.
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This price spiking is also associated to professional traders understanding that most retail traders
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will place their stop losses below or above these levels.
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Therefore, using the top-down analysis as we approach daily and 4-hour time frames, we will plot
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zones instead of single lines using the levels we have plotted on the larger timeframes, such as weekly
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or monthly.
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If this is completely new to you, do not worry.
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Once we start going through examples starting from the next lecture, you will learn how to use this effectively
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in your trading.
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Traders, please go through these guidelines once again and I will see you in the next lecture.
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