Market structure, by definition, is the simplest form of price movement in the market and is meant to be read. It is basic swing highs and swing lows. Market structure is a trend following tool that traders read and follow based on how an asset moves. From bullish moves to bearish and in-between ranges, market Structure is often referred to as price action. We refer to this study as the study of market structure. Because to understand the way the market moves, you need to understand the trend and the anticipated moves. Only then you can add other criteria to your trade qualifiers.
There are three types of market structure:
- Bullish market structure
- Ranges (side ways market)
Bearish market structure
In order to get the most out of the market, you need to learn to recognize the right structure and trend. Most of all we like to see bullish and bearish structure.
BULLISH market structure
A bullish market structure is when the price is in an uptrend, marked by higher highs and higher lows. In an uptrend, buyers (demand) have control of the market. Therefore, when the price makes a break of structure (BOS), we should expect the price to make a decent pullback to create the new low of the uptrend.
BEARISH market structure
A bearish market structure is when the price is in an downtrend, marked by lower highs and lower lows. In an uptrend, buyers (demand) have control of the market. Therefore, when the price makes a break of structure (BOS), we should expect the price to make a pullback to create a new low of the uptrend. In a downtrend, sellers (supply) have control of the market. When the price makes a BOS, it creates a new Lower low of this trend. We should expect a pullback after the new Lower low to create the new lower high of this trend.
Ranges (sideways market)
When a price is not making new higher highs or lower lows and is stuck in a range, then we say its a sideways market structure or range. And we don’t trade in a corrective phase of the market. We only trade when momentum is present in the market.
This is not the only way we can look at market structure. We can track structures from different timeframes, learn more about multi-timeframe structures below.
It is crucial to observe the chart on multiple timeframes. If we consider several time frames and they match, you will be able to predict the next move more easily.
It is important to recognize the beginning of a trend, you are probably wondering how to know before the trend begins. We need to see how we break the structures if the momentum is present then we can easily predict the trend, you will learn more about this with the help of BOS and CHOCH in the next part.
BOS AND CHOCH
Break of structure or BOS is the term used by traders, and it simply indicates a break of recent structure:
In this example, we can see the movement of the price in an uptrend (the price is breaking the structure and making new higher highs and higher lows)
In this example, we see price is moving in a downtrend (the price is breaking the structure and making new lower highs and lower lows).
You have to learn to distinguish between HP BOS and bad BOS, because we need to see a great break of structure in order to expect a continuation of the trend.
CHOCH by definition, means Change Of Character, change in the market structure. When you catch the beginning of ascending/descending channel (reversal trade), CHOCH happens.
The method when the price breaks the last structure LOW in an uptrend or the last structure HIGH in a downtrend by itself is known as CHOCH and is not enough to jump into a trade. We will look for more confirmations along with CHOCH to increase the probability of our trade.
In this example price makes a breakout of the last structure high:
In this example price makes a breakout of the last structure low:
You have to learn to distinguish between HP CHOCH and bad CHOCH, because we need to see a good change of character in order to expect a change of trend.
When we learned how the structures work, we can use that advantage during trading, in the next part you will learn what a High probability reversal and continuation setup looks like.
This pattern forms when the price is moving in ascending price action, making higher highs and higher lows. Then the price broke demand and higher low, making the change of character and Lower Low. Because demand and ascending structure is broken, we can expect to see supply to be respected. It is very important how we broke the demand and higher low, because that will tell us if the price wants to change its character or make a reversal. Price should make liquidity before tapping on supply.
This pattern forms when the price is moving in descending price action, making lower highs and lower lows. Then the price broke supply and the lower high, making a change of character and Higher High. Because the supply and descending structure is broken, we can expect to see the demand to be respected. It is very important how we break supply and lower high, make sure that the momentum is present in your side. Price made liquidity before tapping on the demand.
This pattern forms when the price moves in a bullish structure, making a higher low and higher high, in this situation demand zone is in the control. This pattern is called bullish continuation because we are not at the start of an ascending structure.
This pattern forms when the price moves in a bearish structure, making a lower low and lower high, in this situation supply zone is in the control. This pattern is called bearish continuation because we are not at the start of an descending structure.