Key: Market structure with laser eyes
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Market Structure is considered the cornerstone of price action trading and serves as the foundation for nearly every decision made by traders in this field. A deep understanding of market structure is crucial for those serious about mastering price action trading.
Market structure is one of, if not the most important aspect of the market. No other indicator will give you the information that market structure does. All the answers to where the market is willing to go will be found once structure is recognised and applied correctly. This topic will need to be understood and studied thoroughly so take your time.
Simply put, market structure consists of the highs and lows that are created in a trending environment. The formation of these highs and lows inform us of the bias and what kind of market we are in. For example, if we have repeating higher highs and higher lows, the market is showing a clear willingness to provide us with higher prices and move bullish. If we are presented with lower highs and lower lows, the market is showing us a clear willingness to move bearish and provide us with lower prices. Understanding this on a higher time frame will allow you to determine the overall long term trend of the market.
As shown on the chart, we have a clear formation of higher highs and higher lows. This establishes the overall trend as bullish, therefore, the highest probability setups would be long positions from the discount end of the most relevant price range. Accumulating long positions from these discount prices would allow you to hold these positions to the previous major structural point. For example, in this case, that would mean getting in long at a higher low, and holding the trade to the previous high.
This brings us on to the idea of having expectations from the market. Using basic knowledge of structure, we can expect that once a higher high is made, a retracement is due in order to make a higher low, which would then go on to make another higher high. The opposite is true for bearish market conditions. Understanding this allows us to be smart with our profit taking. For example, if we are in a long position at a higher low, we can expect a higher high, therefore, taking profits at the previous high would be a generous, yet sensible target. However, if we are trading short from a higher high, we aren’t expecting the previous low to be purged, and therefore we have to take profits in sensible areas above the previous low. Countertrend trading always has its risks but using the correct system allows this risk to be minimised. Just because we are overall bullish, however, doesn’t mean that we should only trade long positions from higher time frame higher lows. This is because between every higher high and higher low is bearish price action which can be traded using the same logic.
As is shown below, this H4 bullish cycle lasted just over 57 days. For 25 of those days, however, price was bearish and can be traded.
As you can see above, even in a bullish market, there are periods of time where price will be bearish by definition. The first bearish leg is clearly a retracement, and on lower time frames would consist of lower highs and lower lows. This would characterise the bearish structure, but to the uninformed would also mean that price is now overall bearish. However, this is not the case. Even though the retracement displays bearish market structure, we are still inside the parent, bullish price leg. Therefore, until we break the previous higher low, we are still bullish overall.
This can be better appreciated using the screenshot above. The green structural points demonstrate the overall bullishness of the market, whereas the inner red structural points demonstrate the bearish retracement which is within the overall bullish structure.
Understanding that we are only bearish for a retracement within the parent bullish leg allows us to expect that once we are in the discount end of the parent price range, the higher time frame higher low can be formed and the inner bearish structure can shift and follow the overall bullish trend.
The example above shows that once we reach specific levels which will be explained in the rest of the strategy, we can expect a shift in structure on the lower time frames from bearish retracement to bullish continuation. Understanding whether you are trading a continuation or retracement will allow you to maximise profits whilst minimising risk and avoid getting caught on the wrong side of the market.
When studying structure, it is also imperative to use your knowledge of price ranges in conjunction with external and internal structure. As mentioned, retracements will display countertrend structure, and if you are unaware of where you are in the market, it is easy to get caught out.
On the left, we can see that there is a clear formation of higher highs and higher lows. In this environment, traders will naturally look for longs and they wouldn’t be completely wrong. However we see on the right that price crumbled where traders would’ve expected a higher low.
This is because they failed to realise that the formation of discrete higher highs and higher lows was all a part of internal structure inside the parent price range. For bullishness to be established, the highest high had to be broken. Therefore, even though higher highs were of STRUCTURE being formed, they weren’t the higher highs we need to establish bullishness. Therefore, since the market failed to make a higher high and ended up making a lower low, we can shift our expectations of the market. Furthermore, notice how the recent lower low was made from the premium end of the parent price range.
Now, since a higher high failed and a lower low was made instead, using the rest of the strategy, we can expect a lower high at specific areas which would lead to another lower low.
Below is an example of the way the market can be read using proper knowledge of market structure.
Market structure is one of, if not the most important aspect of the market. No other indicator will give you the information that market structure does. All the answers to where the market is willing to go will be found once structure is recognised and applied correctly. This topic will need to be understood and studied thoroughly so take your time.
Simply put, market structure consists of the highs and lows that are created in a trending environment. The formation of these highs and lows inform us of the bias and what kind of market we are in. For example, if we have repeating higher highs and higher lows, the market is showing a clear willingness to provide us with higher prices and move bullish. If we are presented with lower highs and lower lows, the market is showing us a clear willingness to move bearish and provide us with lower prices. Understanding this on a higher time frame will allow you to determine the overall long term trend of the market.
As shown on the chart, we have a clear formation of higher highs and higher lows. This establishes the overall trend as bullish, therefore, the highest probability setups would be long positions from the discount end of the most relevant price range. Accumulating long positions from these discount prices would allow you to hold these positions to the previous major structural point. For example, in this case, that would mean getting in long at a higher low, and holding the trade to the previous high.
This brings us on to the idea of having expectations from the market. Using basic knowledge of structure, we can expect that once a higher high is made, a retracement is due in order to make a higher low, which would then go on to make another higher high. The opposite is true for bearish market conditions. Understanding this allows us to be smart with our profit taking. For example, if we are in a long position at a higher low, we can expect a higher high, therefore, taking profits at the previous high would be a generous, yet sensible target. However, if we are trading short from a higher high, we aren’t expecting the previous low to be purged, and therefore we have to take profits in sensible areas above the previous low. Countertrend trading always has its risks but using the correct system allows this risk to be minimised. Just because we are overall bullish, however, doesn’t mean that we should only trade long positions from higher time frame higher lows. This is because between every higher high and higher low is bearish price action which can be traded using the same logic.
As is shown below, this H4 bullish cycle lasted just over 57 days. For 25 of those days, however, price was bearish and can be traded.
As you can see above, even in a bullish market, there are periods of time where price will be bearish by definition. The first bearish leg is clearly a retracement, and on lower time frames would consist of lower highs and lower lows. This would characterise the bearish structure, but to the uninformed would also mean that price is now overall bearish. However, this is not the case. Even though the retracement displays bearish market structure, we are still inside the parent, bullish price leg. Therefore, until we break the previous higher low, we are still bullish overall.
This can be better appreciated using the screenshot above. The green structural points demonstrate the overall bullishness of the market, whereas the inner red structural points demonstrate the bearish retracement which is within the overall bullish structure.
Understanding that we are only bearish for a retracement within the parent bullish leg allows us to expect that once we are in the discount end of the parent price range, the higher time frame higher low can be formed and the inner bearish structure can shift and follow the overall bullish trend.
The example above shows that once we reach specific levels which will be explained in the rest of the strategy, we can expect a shift in structure on the lower time frames from bearish retracement to bullish continuation. Understanding whether you are trading a continuation or retracement will allow you to maximise profits whilst minimising risk and avoid getting caught on the wrong side of the market.
When studying structure, it is also imperative to use your knowledge of price ranges in conjunction with external and internal structure. As mentioned, retracements will display countertrend structure, and if you are unaware of where you are in the market, it is easy to get caught out.
On the left, we can see that there is a clear formation of higher highs and higher lows. In this environment, traders will naturally look for longs and they wouldn’t be completely wrong. However we see on the right that price crumbled where traders would’ve expected a higher low.
This is because they failed to realise that the formation of discrete higher highs and higher lows was all a part of internal structure inside the parent price range. For bullishness to be established, the highest high had to be broken. Therefore, even though higher highs were of STRUCTURE being formed, they weren’t the higher highs we need to establish bullishness. Therefore, since the market failed to make a higher high and ended up making a lower low, we can shift our expectations of the market. Furthermore, notice how the recent lower low was made from the premium end of the parent price range.
Now, since a higher high failed and a lower low was made instead, using the rest of the strategy, we can expect a lower high at specific areas which would lead to another lower low.
Below is an example of the way the market can be read using proper knowledge of market structure.
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All our work is for informational and educational purposes only. Past performance does not guarantee future results.
All our work is for informational and educational purposes only. Past performance does not guarantee future results.
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