Understanding Market Structure

Market structure is the foundation of all trading strategies, providing insight into how price moves and trends develop. Understanding market structure allows traders to identify key levels, recognize trends, and predict potential price movements with greater accuracy.

1. Trends

Markets move in three primary directions: uptrend, downtrend, or range-bound (sideways market).

Uptrend: Higher highs (HH) and higher lows (HL), signaling strong buying momentum.
Downtrend: Lower highs (LH) and lower lows (LL), indicating dominant selling pressure.
Range-bound: Price moves sideways within a defined support and resistance level without clear direction.

2. Support and Resistance

Support is a price level where demand is strong enough to prevent further decline. It acts as a “floor” where buyers step in.
Resistance is a price level where selling pressure is strong enough to prevent further price increases. It acts as a “ceiling” where sellers take profits.

3. Swing Points (Highs and Lows)

Swing Highs: Peaks in price movement before a decline.
Swing Lows: Valleys in price movement before a rise.

These points help traders determine trend direction and set stop-loss orders and also helps determine if the chart will break up or down depending on the overall trend.

4. Breakouts and Fakeouts

A breakout occurs when price moves beyond a significant support or resistance level, often leading to strong momentum in that direction.
A fakeout happens when price briefly moves beyond a key level but quickly reverses, trapping traders who entered too early.

5. Market Phases

Markets move through different cycles:

Accumulation – A sideways phase where smart money is buying before a trend starts.
Markup – A strong uptrend where prices rally as demand increases.
Distribution – A sideways phase where smart money takes profits before a downtrend.
Markdown – A strong downtrend where prices decline as selling pressure dominates.