Market Structure Notes

Market Structure

  • Market structure is the trend or direction in which the chart is going.

Types of Trends

  • Uptrend (Bullish Market): The market is trending upwards.
  • Downtrend (Bearish Market): The market is trending downwards.
Uptrend
  • Consists of higher highs (HH) and higher lows (HL).
  • A new higher high is formed when the price closes above the previous high.
Downtrend
  • Consists of lower lows and lower highs.

Candlesticks and Structure

  • Structure needs at least two consecutive candle closes to be valid.
Uptrend Example
  • Series of higher highs and higher lows.
Downtrend Example
  • Series of lower lows and lower highs.

Change of Character (CHoCH) / Break of Structure (BoS)

  • This is when the chart has permission to change trend from downtrend to uptrend or vice versa.
Uptrend to Downtrend
  • The price was in an uptrend, making higher highs and higher lows.
  • A higher low is broken, closing below the previous low, signaling a potential downtrend.
  • The market then makes a lower high and a lower low, confirming the downtrend.
  • After a break of a new low, the price sometimes pulls back before continuing the downtrend.
Downtrend to Uptrend
  • The price was in a downtrend, making lower lows and lower highs.
  • The price breaks above a lower high, indicating a potential change of character.
  • The market pulls back and then pushes upward, confirming the uptrend.

Candlestick Considerations

  • Wicks on candlesticks are not considered valid structure.
  • The bodies of the candles define the structure.
  • On a line chart, wicks are not visible, only the closing prices (bodies) are represented.

Consolidation

  • The market moves sideways, without significant upward or downward movement.
  • The market is in a range until it breaks out either to the upside or downside.
  • It's often best to avoid trading during consolidation.
  • A breakout occurs when the price closes above the consolidation range (for an upward breakout) or below it (for a downward breakout), followed by a potential pullback and continuation.

Time Frame

  • Different time frames show different levels of detail in price movement.
Candlestick Representation
  • One-minute time frame: Each candlestick represents one minute of price action, showing more movement.
  • Higher time frames (e.g., 15-minute): Show less detailed movement and a broader view.
  • Lower time frames (e.g., 3-minute, 5-minute): Show more movement and detail compared to higher time frames.
Higher Time Frame Preference
  • The higher time frame trumps lower time frames.
  • The higher time frame provides a higher probability understanding of the overall trend.
Trading Strategy
  • If a higher time frame shows a break to the downside, the market is likely to pull back before continuing downward.
  • Day traders and scalpers can take advantage of both buy and sell opportunities, but understanding the higher time frame trend is crucial.