Why Basic Market Structure Is Important To Understand
At its very essence, understanding market structure is a key skill to have in your arsenal of tools as a trader. Without a proper understanding of structure, you won’t have a good sense of market direction, and even worse, you may find yourself trading counter-trend without even being aware of it! Understanding market structure means you’ll have a sense of how the market is trending, and where it’s likely to go next, so you can take trades both with the trend and even counter trend if you want to.
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Basic Market Structure Works On Any Pair or Trading Instrument
No matter what instrument you trade, whether it’s EURUSD, GBPUSD, indices, stocks, or commodities, our approach to mapping out market structure mechanically works. Despite the fact that forex pairs tend to be range bound in the long term, and stocks and equities tend to trend up, it doesn’t mean that we can’t identify and capitalise on moves in both bullish (uptrending), and bearish (downtrending) markets.
Why A Consistent & Mechanical Approach To Market Structure Is Important
If you often find yourself getting lost in the market, it’s likely because your approach to market structure lacks consistency and you are failing to systemize your method of analysing structure in a mechanical way. By using our mechanical method for determining market structure, you’ll gain consistency in your trading and understanding of where the market is moving, so you can capitalise on those moves.
How Understanding Basic Market Structure Will Improve Your Trading
Catch Higher Risk To Reward Ratio (R:R) Trades
The first benefit to understanding and utilising basic market structure is that you’ll likely catch higher R:R trades as you’ll find yourself more accurately predicting where the market is going. On top of that you’ll also find that you’re going to be able to catch more trades that are in the direction of the trend, meaning that you can hold them for longer, and therefore pull higher R on those trades on average.
Produce A Better Strike Rate (Win Rate)
The next way that your trading will improve from understanding market structure is with a higher strike rate (win rate). Since you’ll no longer be trading counter-trend and not knowing it, you’ll find yourself in trades that play out in your favour.
Gain Confidence & Clarity In Your Trading
Last but not least, with a proper understanding of market structure, you can expect to gain confidence, clarity, and consistency in your trading. Remember that without proper market structure, you’ll trade against the trend, take more losses, and that will inevitably erode away at your confidence. This is your chance to unlearn bad habits and learn how we approach marking out structure at Phantom Trading.
Market Structure Basics
The basics of market structure include understanding how to mark out highs and lows (market swing points), identifying bullish and bearish trends in the market, and understanding what strong and weak highs and lows are. Finally we’ll also cover internal market structure (orderflow), also known as Changes of Character. By covering all of these concepts on a single time frame you’ll build the foundation for being able to mark out structure in a mechanical way so you can apply those skills correctly when tackling advanced market structure.
What Is Swing Market Structure?
Swing market structure is simply defined as our major swing points in the market on the respective timeframe that we’re on. To determine swing structure, we must first look for two very clear major highs and lows (our structure range), and look to see whether the high or low gets broken by price which tells us whether the market is bullish or bearish.
How To Map Swing Structure on A Chart
To map structure points on a chart, it’s as easy as finding the current structure leg or range we’re in, and mapping out whether the high or low breaks, then waiting for a significant pullback after the break of structure to start to define our presumably weak structure point we are expecting to break based on the previous trend or breaks in structure. Then we use our new structure range to see if the trend continues (by breaking structure in the same direction), or if swing structure is shifting as it breaks in the opposite direction.
What Is a Trending Market (Market Trends)?
Trending markets are simply markets that are continuing to break in one direction, either creating bullish or bearish market structure. A trend is only truly established when a market breaks into the same direction as the last structure break two times or more. As shown in the diagram below, these are some forms of market structure trending both bullish and bearish.
Bullish Market Structure (Up Trending Markets)
Bullish market structure is defined by a market that is trending up and is creating Higher Lows (HL), and Higher Highs (HH). A bullish market is also characterised by rising prices of that asset or equity, and typically has impulsive moves up and corrective pull backs.
Bearish Market Structure (Down Trending Markets)
Bullish market structure is defined by a market that is trending down and is creating Lower Highs (LH), and Lower Lows (LL). A bearish market is also characterised by rising prices of that asset or equity, and typically has impulsive moves up and corrective pull backs.
Strong Highs & Lows (Protected Structure Points)
Strong highs and lows are swing structure points that are responsible for breaking structure. They are also considered protected structure points because the idea is that price should hold from these levels if price continues the trend that it’s in.
In a bullish, up trending market, it would be higher lows (HL), that are responsible for breaking previous higher highs (HH). In a bearish, down trending market, it would be lower highs (LH), that are responsible for breaking previous lower lows (LL).
Weak Highs & Lows (Targeted Structure Points)
Finally we have weak highs and lows, or targeting structure points in which we are expecting to break based on the current trend or market structure that we’re in. Using weak levels of structure to trade from would typically mean we’re trading counter trend, which is okay in some cases, but generally is more risky and less profitable overall as price won’t tend to run for long from these levels.
In a bullish, uptrending market, it would be higher highs (HH) that form as a result of a bearish pullback or correction in a bullish market that we expect is weak and targeted.
In a bearish, downtrending market, it would be lower lows (LL) that form as a result of a bullish pullback or correction in a bearish market that we expect is weak and targeted.
See the diagram below for an illustration of the difference between strong and weak highs and lows in more detail.
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What Is A Trend Change (Shifts in Structure)?
As mentioned previously, trend changes (also known as shifts in structure) occur when a trend is interrupted by a break of structure in the opposite direction of the previous break or trend. That could mean a bullish (up trending) market shifting bearish or a bearish (down trending) market shifting bullish.
Again, to establish a new trend we’ll need two or more swing structure breaks in a particular direction otherwise it’s likely that we’re just in a ranging or corrective market (a market that breaks both up and down with no sense of direction, or remains within a structures range leg in a complex pullback where only internal structure breaks are happening but both the current structure range high and low is remaining intact.
In the diagram below you can see the moment where swing structure shifts from bullish to bearish (green to red line), and when it shifts back again to bullish (red to green line).
What Are Internal Market Structure Breaks (Orderflow/ChoChs)?
An internal market structure break is simply when there is a minor break in structure in between the major swing highs and lows, indicating a shift in orderflow (also known as a change of character). The easiest way to identify an internal structure break is to look for a minor level of supply or demand, and to see if it’s been violated. Also, remember that internal structure breaks happen within the larger swing structure range that price is currently in.
What Are Pullbacks vs Trend Changes (Continuations vs Reversals)?
A pullback is simply a corrective pause in price before it continues in the same direction as it was previously going. Corrective pullbacks can push in the opposite direction of the trend (most typical pullbacks), or in some cases can even fade and correct slowly in the direction of the trend, which makes them a little bit harder to identify.
On the other hand, trend changes occur when a pullback fails to break into the same direction as a trend, which effectively means that price shifts in market structure and begins to make a reversal pattern. What’s important to remember about reversals is that you should only be looking for them if several confluences align in a way that tells us that there is a somewhat high probability that price will reverse, otherwise you’ll be trading counter trend more often than not, in areas that have a low chance of reversal.
For example, if the 4-Hour swing structure is bearish, but pulling back bullish, and the 15-Minute swing structure shifts bullish, this would be an opportunity to play a reversal on the 15-minute trend, knowing that you’re trading against the 4-Hour trend in a corrective pullback will likely expire, so you won’t hold onto that position thinking it will take out the previous 4-Hour strong high (lower high).
Examples of Structure Mapping on Candlestick Charts
See below for a couple of examples that cover both the daily and 4-hour charts so you can get an idea of how to map out basic structure with actual Japanese candlesticks.
Daily Market Structure Chart Example
4-Hour Market Structure Chart Example
Ready To Learn About Advanced Multi-Timeframe Market Structure?
Once you’ve gone through and learned basic market structure, be sure to check out the advanced market structure training article, video training, and PDF guide which you can find links for below:
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