What is Market Structure & How It Can Help You Make Informed Decisions

Market structure (MS) is the visual organisation of price movement within a timeframe. Analysing the market structure involves the examination of market behaviour (formations or moves) on a chart, to spot and interpret repeated patterns, key levels or trends.

It helps you to anticipate possible directions and invest accordingly.

Let’s look at its key parts, useful patterns, how to analyse, and benefits:

1. Trends

They represent the sustained direction of price.

Higher highs plus higher lows = uptrend
Lower highs and lower lows = downtrend

The type of trend identified will give you a picture of the power dynamic between buyers and sellers and guide your position for future direction.

2. Consolidation

It is a range (sideways market or indecision zone) when price is seen moving within a defined horizontal channel.

Here the market bounces between equal highs and lows (or we can also say, upper & lower boundaries).

Unlike a trend, no party has lasting control here. There is a power balance in the market. Price is not making noticeable progress in one direction.

Consolidation is often where the market digests previous moves and gathers energy for the next strong push.

3. Key levels

Outside trends and ranges, some price points are also vital to structureology:

Swing highs and lows: Identifying these points can enable you define the current trend or range. It can also help you discover areas where price could reverse or continue.

Support and resistance: These horizontal price levels are where buying or selling pressure is expected to emerge.

Previous swing highs most of the times become future resistance and previous swing lows often become future support.

It is necessary to understand these levels if you want to establish potential entry & exit points.

Break of structure & change of character: BOS refers to a situation where price breaks a decisive swing high in an uptrend (or swing low in a downtrend). It usually signals trend continuation.

CHOCH or market structure shift, on the other hand, explains a condition where the market breaks an important swing point against the dominant trend. When this happens, we expect a possible trend reversal.

Candlestick patterns for market structure analysis: Additionally, some candlestick formations can be used to decipher the sentiment/strength/weakness of market participants at a particular time (especially around key levels):

Formations like hammers, shooting stars, dojis at highs/lows or key support/resistance, can mean possible reversal.

Whereas, flags or pennants can suggest a momentary pause before the existing trend resumes.

(They mostly form as a temporary consolidation following a strong move within an established trend).

Steps to carry out market structure analysis

1. Start from higher to lower time frames: Since structureology can differ across timeframes, you want to start by checking bigger timeframes (example, daily, 4hr) to see the dominant bias, then narrow it down to the smaller ones for precision.

2. Determine the current trend: Check your chart and establish if the market is making higher highs & lows (uptrend), lower highs and lower lows (downtrend), or ranging.

3. Identify important swing highs & lows: These are the “peaks” and “valleys” of price action. Noting these price points on the chart also assist you to spot the prevailing trend.

4. Mark out key support and resistance zones/trendlines: Doing this helps you see where price will likely react. So, you prepare ahead.

5. Find BOS or CHOCH: You also want to pay close attention to when price breaks significant swing points. Does it hint continuation or a possible reversal?

6. Validate your speculation with candle formations: Lastly, you may use candlestick patterns at key levels or after structure breaks to gain trading confidence about the market’s intention.

Advantages

1. It gives traders a solid framework for the identification of high probability entry & exit points.

2. With MS, you implement better risk management.

3. Also, it helps you ascertain if the market is trending or not.

4. You can anticipate reversals and continuations with more accuracy.

5. It provides context and clarity. It makes it easy to understand what is driving price movement.