What is market structure?
Market structure refers to the visible evolution of market movement and places where those movements stopped. The key elements of market structure are the peaks & troughs price has made over time, by moving upwards & downwards.
First, let's define price structures, beginning with continuation:
The first up candle breaks the high of the previous candle, creating an upwards lead. The subsequent candles confirm this lead, creating continuation.
Continuation means a consecutive candle in the same direction, which does not violate the prior candle’s low (in an upward lead) or high (in a downwards lead).
Let's now define a lead change as the violation of a previous candle's low (in an upwards lead) or the previous candle's high (in a downwards lead):
In alead change, the candle breaks the previous candle's low, creating a new high. Obviously, a new high candidate cannot be confirmed until the next candle closes.
Now that we understand the concept of new highs and lows, we can define the market structure as the current disposition of demand and supply in the form of subsequent highs and lows. From a price action point of view, we can broadly speak of a trending structure, a ranging structure or something that's not clearly one or the other.
USDCAD D1 – Pepperstone MT4Another term used is: support becomes resistance (downtrend) or resistance becomes support (uptrend).
In a clear trending structure, we have subsequent lower highs and lower lows.
USDCAD D1 – Pepperstone MT4When do you know there's a trend? When you can see one! Or at least when you have a completed 1-2-3 pattern (so price pushing below point 2 and finding sellers on the re-test).
“Where does price find support?” = “Where did price bounce evidently out of trend?”
USDCAD D1 – Pepperstone MT4
So why is it a good idea to wait for the Trending Pattern to complete, before stepping in to trade it as such? Here are the two main problems you can encounter:
And for a real life example, on GBS/USD: price makes a 1-2-3 but falls back down.So now we know that a trend reversal requires 2 higher lows and 2 higher highs before we can start looking for pullbacks or breakouts into the new trend:
GBPUSD building a strong reversal setup.Now that we know what is required to flip a trend on its head, we can also use the failed 1-2-3 reversal pattern as an entry into an established trend. As price pulls back and attempts a 1-2-3, no doubt confusing many novice traders and luring them into reversal trades, the savvy trader will simply be looking to take the opposite side of the trade. Here is an example:
What is the key to identifying and playing high probability pullbacks like the ones above?
Now let's take a look at a clear range structure:
- trust the trend in place: think continuation and not reversal.
- stalk evident levels (like failed 1-2-3s) where shorter term traders will be expecting a reversal. Frequently, that’s exactly where the trend traders will engage with the trend once more.
You need a clear ceiling (resistance) and a clear floor (support) to define a range
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