- Market Structure helps traders learn the current market trend and make informed decisions.
- It forms the basis for day and swing trading in almost all the different types of market assets like stocks, futures, cryptocurrencies, forex, and others.
Traders often rely on several analysis tools to guess the present market conditions and predict the future accordingly. Their aim, find potential trading opportunities and make profits. Many naive traders look for tools that will give them an edge over others and result in 100% profit. In doing so, they ignore the basic principles of trading, i.e., market structure.
Market Structure (MS) is as old as the financial markets and serves as the foundation for a successful trading career. In short, it helps traders identify resistance and support levels as well as swing highs and swing lows. People can identify the price movements and decide the best position, long or short, that would reward profit.
Understanding Market Structure
As the name suggests, it is the basic infrastructure that helps traders understand the current market behaviour and flow, with main highlights on the resistance and support levels. MS works in accordance with two principles which are, the price always moves within a support and resistance range, and any breakout from the current zone leads to the price moving into another zone.
Support and Resistance are just two price zones or levels where the price usually changes its trend. The level where, in a downtrend, the price reaches the minimum and starts to climb is called support. It supports the upliftment of price. In contrast, the level where, in an uptrend, the price reached a maximum and now falls back is called resistance. It resists a further rise in the price. These are the results of differences in buying and selling pressure, which in turn are caused by demand and supply.
Based on the price movement, the market structure has been broadly classified into three basic types. Market structures always follow some trend and this trend completely depends on the timeframe of the trader. Different time frames result in different market structures for the same commodity. The three types are:
Bullish Trend
The trend is formed by a continuous run of higher highs (HH) and higher lows (HL). The trend breaks when a lower low (LL) is finally recorded.
Bearish Trend
The trend is formed due to a continuous run of lower lows (LL) and lower highs (LH). The trend breaks when a higher high (HH) is finally recorded.
Sideways Trend
The trend is formed due to a continuous run of equal highs (EH) and equal lows (EL). The trend can be broken from either the bottom or the top and it indicates the onset of either of two previous trends.
Although the market structure is the base for all the market’s assets, futures, bonds, forex, and stocks are the best assets to consider. A large number of participants, increased liquidity and high volume make these trends follow quite an obvious market structure and their prediction becomes easy.
A low-volume asset viewed over short timeframes makes the MS difficult to read and is suitable for day trading or scalping. A medium volume asset viewed over a medium timeframe makes the MS pretty understandable and is suitable for day trading or swing trading. To practise the most profitable swing trading, an asset with high volume and a large timeframe is the best.
Conclusion
Forex traders generally indulge in swing trading with the help of market structure to make profits. The lack of any centralised exchange also means the absence of any indicator or volume. Although there are several tools available to traders for future markets, with order flow being quite famous, the market structure still serves as the basis for day and swing trading. Similarly, not only learning the fundamental analysis of stocks is better for traders, but also learning the entry and exit points through technical analysis and market structure is highly rewarding.