Market Structure

MARKET STRUCTURE

Market structure is the blueprint of the markets. The markets may seem random but beneath the surface, it follows a structured pattern in whichever direction it goes, almost resembling a staircase pattern. Price will make form a series of Highs and Lows as it creates its trend. Looking at the image below, what we have is a depiction of market structure in its basic form.

When price is making a series of Higher Highs and Higher Lows, that is classified as an uptrend. During an uptrend, you want to be looking for buy opportunities, and the best area to look for them would be when price forms a Higher Low. When price is making a series of Lower Highs and Lower Lows, that is classified as a downtrend. The Lower Highs of the downtrend is where you want to be looking for sell opportunities. However price will not always be in a trending market. Many times price will consolidate or form a sideways pattern, signifying that there is neutral strength between buyers and sellers. In that case, it’s best to stay away from the market, especially when there is no clear trend direction as price can go either ways.

The structure of the market can be broken down into components. When price is in a trend, it will make a series of impulses and retracements. The impulse leg is a section of price in which there was a quick, sudden movement that pushes price with the trend. The retracements of the trend is when price goes against the trend for a small period of time. As you can see from the image below, the impulse legs (in blue) will always be longer than the retracements. The retracements (in red) are shorter and will have shorter candles, indicating low volume in the market.

The retracements of the trend are where we want to be looking for entries, as this will provide the best setups. When price is moving and it’s at its impulse phase, you want to wait until price has finished moving, and is slowly starting to pull back to form a retracement. Once price has finished it’s retracement, that’s when you want to look to enter.

Downtrend

During a downtrend, price will make a series of Lower Highs and Lower Lows. You only want to be looking for sell setups during a downtrend as this will give us the best and highest probability trade.

Uptrend

During an uptrend, price will make a series of Higher Highs and Higher Lows. You only want to be looking for buy setups during an uptrend as this will give us the best and highest probability trade.

Consolidation

When price is going sideways and it’s not showing a clear trend, that’s a consolidating market. During consolidations, it’s best to stay away from the markets and wait until price breaks through the consolidation. Consolidations happen often in the markets, and by spotting these early, you can save yourself from unnecessary losses.

Break of Structure

Whenever price breaks through a level of support/resistance, that’s what you would call a break of structure. Break of structure means that price is either going to switch trend or continue its trend, depending if its a support level or a resistance level that was broken. During an uptrend, if a resistance level is broken, price will likely keep pushing up. If the support level is broken, it’s likely price has switch to a downtrend. During a downtrend, if a support level is broken, price will likely keep pushing down. If the resistance level is broken, it’s likely that price has switched to an uptrend.

Structure Within Structure

Price is fractal. This means that the structure that you see right now, you will also see them in the lower time frames. Many times price will not retest the broken structure that was broken on the time frame you are on but rather a timeframe lower. This will result in imperfect retests where price will not retest the broken structure at the exact level but rather go even deeper and retest the lower time frame structure.