A representation of established pricing activity is referred to as market structure, also known as the market state.
Price activity fluctuates throughout a certain period of time, going up, down, or sideways. The structure of the market is based on the outcome of these changes. Market structure is the easiest way to interpret price movement in the market. Swing highs and swing lows are the fundamental levels of support and resistance on the charts. These levels are simple to recognize and maintain until they don’t.
Traders read and monitor market structure as a trend-following technique based on how an asset moves, spanning from bullish to bearish movements and everything in between. Any market, including those for stocks, futures, currency, commodities, digital assets like cryptocurrencies, and even tangible assets like real estate, can apply the same basic concepts.
Types of Market Structure
Simple market structures provide a fundamental framework for comprehending how markets function. Just three different market structure types make it simpler. Although Price Action is the sole basis on which the market moves without taking into account current patterns and how they might continue.
Successful trading depends on being able to recognize when a change occurs based on the timeframe you monitor. The market goes in three different directions at any one time. There are three different market structures:
- Bull market
- Bear market
- Sideways trend
Bullish Market Structure
A bullish market structure is one in which a string of higher highs and higher lows has been formed. In layman’s terms, the price is said to be creating a bullish structure when it is setting new highs and lows. Bull markets are marked by optimism, investor confidence, and the assumption that recent success will last for a while.
Consistently predicting when market dynamics might shift is challenging. The fact that psychological factors and speculative activity can occasionally have a significant impact on the markets is one of the challenges. Investors have the chance to profit from growing asset values when a trend is upward.
One of the best methods to prevent significant losses brought on by a shift in trend is to sell an asset after it has failed to produce a higher peak and trough. Trendlines are used by certain technical traders to identify uptrends and potential trend reversals. The trendline is created along the ascending swing lows to help illustrate the potential locations of upcoming swing lows.
Bearish Market Structure
Lower lows and lower highs characterize the price movement of the bear trend. As long as lower highs are still being printed, the bear trend will persist, but once a higher high enters the price, the trend will terminate. Price starting to record equal or higher lows is a hint that the trend may be changing. During this time, the bulls are completely ignored by the bears as they ride them down the hill. They effectively defeat the bulls and drive prices down. Lower highs and lower lows are formed consistently as a result of this.
Sideways Market Structure
A trend with equal highs and lows is said to be sideways. During this stage of the market, price trends are in a range and are settling. Long periods of stability might be followed by market movement. If the price departs from either the higher or lower range, the trend is broken. One of the first two trends may be starting with a sideways trend.
Now that the market’s bulls and bears are of equal strength, a consolidation has formed. The majority of the time, traders refer to such markets as ranging. No one is dominating the other in this situation. Because the market doesn’t make it clear where it may be headed, this is not a trending phase. Price simply stays within a range.
Support and Resistance Levels in Market Structure
Support and resistance levels are equally vital to market structure and trend structure. Finding entries and exits will be simpler if you know where to draw your support and demand zones. Depending on what you’re trading, support and resistance levels can be drawn on a variety of different timescales.
It is a price level where a concentration of demand or purchasing interest can stop a downtrend. Large numbers of buy orders from influential market participants are typically present at support levels in the order book. The term “Demand Zone” can also be used to describe a support zone. Since support signals buying pressure, this area is where every trader would like to start buying.
It is a price level where there are fewer buyers than sellers, and an upswing is resisted. The order book has a lot of sell orders at resistance levels. When the power of the bulls weakens, and the price is in a zone of resistance, there is intense selling pressure. A “Supply Zone” is another name for a resistance zone. In this area, traders are hunting for chances to sell.
A horizontal line is created to indicate that the market is difficult to move past that level if the price stops and reverses in the same price area twice in a row. The price experiences higher highs and higher lows during an uptrend. Lower lows and lower highs are made by the price during downtrends.
Connect the trend’s highs and lows. Then, stretch that line to the right to observe where future support or resistance for the price might appear. Simple lines like this draw attention to trends, ranges, and other chart patterns. They give traders a view of the market’s present movement and potential future course.
Market Structure Patterns
In order to fully understand the market structure, traders need to know the price action and its types.
Recurring and recognized price movements make the price action patterns. Often, trend lines and/or curves serve as indicators. It typically denotes price movement reversals, a continuation of current movements following a brief pause, or a breakout.
The three types of price action are.
- Breakout price action patterns.
Price patterns known as continuation patterns indicate a period of stillness, which typically follows abrupt price movements. It is a stage in an uptrend when the bulls pause after strong movements to the upside. It is also a time during a downturn when the bears pause after impulsive downward swings. Continuation patterns, as opposed to reversal patterns, indicate a brief consolidation in the middle of a trend. Price patterns are referred to as continuation patterns when they continue from an earlier trend. They are further classified as triangles, flags, and a cup’s handle.
To further explain, if the second candlestick is closing above the highest high of the first candlestick, it might suggest a bullish continuation. Similarly, if a second candlestick closes below the lowest low of the previous candlestick, it might suggest a bearish continuation.
Reversals frequently result from “take-profits,” which suggests that the dominant bullish or bearish trend, depending on the situation, would run out of steam to further their abrupt movement. At this point, the price experiences a brief stop (without a range) before changing course.
Simply understand, the early sign of a reversal pattern can be identified if the second candlestick fails to hold all the gains and closes below the highest high of the first bullish candle. it shows the weakness of a trend, hence, price failure.
There are two different kinds of reversal patterns. One is the accumulation reversal pattern, and the other is the distribution reversal pattern. Distribution reversals typically occur at market tops, when traders expect to sell because the trading instrument is “overbought.” While accumulation reversals happen when the market is at its lowest point, and purchasing pressure is greater than selling pressure because the trading instrument is “oversold.”
According to its name, a breakout pattern is a price action pattern that appears to cross-resistance or support zones. Trading breakouts is thus one of the finest ways to profit from a bullish or bearish breakthrough. A breakout frequently occurs following a time of consolidation. In most situations, when a financial asset is in a consolidation phase, it is quite challenging to make money. As a result, a breakout presents a chance to identify a trend early and ride it out for a time.
A candlestick chart’s daily price movement information is represented graphically by candlestick patterns, a tool for financial and technical analysis. A type of financial chart known as a candlestick chart displays patterns in the price movement of derivatives, securities, and currencies.
Considering that candlestick patterns often depict an entire day’s worth of price movement, a month will consist of about 20 trading days. They provide a purpose by assisting analysts in making market predictions about future price movements based on past price trends. There are currently 42 recognized candlestick patterns, which is the quantity. These can all be further divided into basic and sophisticated patterns.
Identification of Market Structure with respect to Time Frame
All time frames exhibit market structure, and various time frames frequently exhibit various market structures. For instance, as the market expects a lot of buyers to continue the higher time frame trend, the lower time frame structure may still be in a downtrend even though the entire market structure on the higher time frame may be trending up.
It can be challenging to choose which trading approach is ideal for you. However, the decision you make might not be final. In fact, before deciding on a method and strategy that fits their lifestyle and the money they have to risk, many beginner traders will try any or all of the numerous types. Whichever one applies to you, it’s crucial to determine because the trading style you select will significantly affect your trading results and overall profitability.
Having a thorough understanding of the market as a whole is the greatest strategy. Low, medium, and high time frame structures are included in this. Consider how each time period interacts with the others. Here different trading styles are discussed with respect to different timeframes.
In the trading strategy known as scalping, participants seek to profit from minute price changes. In an effort to capture numerous tiny winnings, scalpers initiate and terminate a large number of deals in a single trading day. Scalpers are known to employ higher amounts of leverage. Usually, they enter and exit the financial markets quickly, mostly in a matter of seconds or minutes.
The primary objective of scalping is to profit from small price fluctuations. Also, in the shortest amount of time feasible. This objective is frequently boosted by a higher position size. Because this sort of trading occurs intra-day, positions are closed before the day’s or session’s end of the trade. Scalping is renowned for its quick executions and fast tempo.
In the most severe cases, if there has been a significant enough price shift, deals are opened and closed in a matter of seconds. Trades must be executed precisely because of the quick speed of the market. To locate setups with the best chances, they often watch for a significant convergence of support and resistance levels.
The technical traders are divided into “Momentum” and “Support and Resistance” (S&R). While S&R relates to Keltner Channels, Pivot Points, and Moving Averages, momentum indicators include RSI, the Stochastic Oscillator, and the MACD indicator.
Overall, this trading approach is characterized by its speed and demand for prompt choices. Scalping systems frequently exhibit larger setup counts, greater win rates, and lower return-to-risk ratios. It is because of more frequent and smaller wins, together with less frequent but bigger losses. The primary requirements are to keep the win percentage and sizes high enough to offset any losses that may occur.
For many traders, day trading and scalping are interchangeable terms. Even if both trading approaches take place throughout a single trading day, we must point out that they differ significantly. In comparison to scalpers, day traders open and close far fewer setups. These traders rarely open more than a few setups per trading day and occasionally just one setup per day.
Even though they both engage in intraday trading, day traders tend to concentrate on the day’s best possibilities. Usually, they hold on for a higher profit aim. As a result, a day trader often keeps onto a position for a number of hours. However, no longer than a complete trading day. The ultimate objective of a day trader is to capture a larger portion of the anticipated daily price movement in a single trade.
For identifying trends and support & resistance, the traders frequently mix price action, like candlestick patterns, with traditional indicators, such as MACD and RSI. For a better comprehension of the entire chart and price structure, they may additionally include patterns, such as chart and wave patterns.
It is a style of trading in which traders hold trades over a few days or weeks while entering and exiting abruptly. Swing trading is fundamentally distinct from long-term trading. Traders use it to pursue opportunities for trading throughout the medium to long term. Even when setups are open for weeks and even months at a time. In most circumstances, the trade setup is not completed in a single day.
While some swing traders prefer to hold out for several weeks, others are willing to close the setup the week before the weekend. Swing traders can employ a variety of time frames, including weekly, daily, 4-hour, and 1-hour charts. If you want to swing trade, your account will probably need extra funds. It is because you’re more likely to hold transactions for longer periods of time. Additionally, you may want a greater margin to do so.
Importance of Market Structure
Since market structure can affect a market’s liquidity and price behaviour, it is crucial for both beginners and experienced traders. It’s also one of the methods that are most frequently used to comprehend patterns, spot potential turning moments, and gauge the state of the market.
The market structure offers tremendous insight into how the market is acting because it is a reflection of the two-way auction process and psychological shifts in market sentiment. It can offer crucial hints regarding the direction that the price action will take next. Furthermore, it also shows what are the levels that are consistently respected over the course of time, meaning, if a level has been tested multiple times, there is a chance of repetition.
The market structure also aids in the development of effective markets. The asset prices reflect all available information. Market makers play a significant role in this and provide liquidity to make sure transactions go smoothly.
A further advantage of adopting a market structure in trading is that it allows analysts to comprehend the overall sentiment. It also aggregates the knowledge of many participants, weighting it according to the magnitude of the transactions they make. Through trendlines and price goal targets, the market structure provides the benefit of specifying when and at what price to buy and sell, which is very advantageous.
The boundaries of a potential formation are chosen and marked out, and these boundaries correspond to a certain price and time coordinates that can be used to create trading and risk management methods.
Market structure can be used by traders to trade any market. In reality, when day trading, it is strongly advised that they do consider market structure. The foundation of all technical analysis trading is market structure. You can trade any market if you know how to trade market structure.
In Forex trading, market structure is frequently used. The same as when you trade or invest in stocks, basic analysis is not everything. It’s interesting how technical analysis may help with entry ideas. When you combine the two, your analysis is strengthened. To trade in markets more effectively at any time with any asset, understand the market structure.