Market Structure




 

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Vocab

HH- Higher High

HL- Higher Low

LL- Lower Low

LH- Lower High

What is Market Structure? 

Market Structure is the technical structure of any market that appears over time as one primary position holds the majority of the strength (buyers or sellers). Market structure is a key technical understanding to be able to identify what the market has been doing in the past and what it has the potential to do in the future.

Market Structure is the continuous series of higher highs and higher lows (bullish market structure) or the continuous series of lower highs and lower lows (bearish market structure). When market structure is non relevant and there are no higher highs or lower lows, this is a time of consolidation.

Market structure is relevant on all time frames, but all time frames may show a different market structure. This is due to the fact that higher time frame overall market structure may be up, lower time frame structure may be in a current downtrend as the market is pulling back waiting for the next influx of buyers to continue the higher time frame movements.

It is important to understand the market structure that all time frames have because as you could be right on the 15 minute or 30 minute, that may just be a short term bearish structure as the higher time frame structure is creating its higher low.

What are the types of Market Structure?

Market structure can be bullish, bearish, or none (we could identify this as a consolidation period).

Bullish

As stated above, bullish market structure is a series of higher highs and higher lows in the markets. We can identify this series by seeing 2 or more sets of higher highs and higher lows like seen below.

USD/JPY 1h

As you can see above, the market structure through this entire bullish movement was creating continuous higher highs and higher lows. Of course market structure is not EXACT, which is why trading is so hard, there is no EXACT path that price will take EVERY time, but you must understand the overall concept and be able to adjust to market conditions.

As you may be able to see, the first few HH and HL are not actually bullish structure, during that time the market is still in a currently bearish structure, BUT as that first HL happens we can begin to anticipate that the markets could potentially be starting an uptrend.

Down Trend

Bearish market structure is a series of Lower highs and lower lows in the markets. We can identify this series by seeing 2 or more sets of lower highs and lower lows like seen below.

GBP/USD 1hr

This is a text book example of bearish market structure on a currency pair. Over the last few weeks GBP has been trending beautifully down creating nothing but LH and LL. It is evident that even in large downtrends we MUST pull back in order to collect liquidity to continue a move to the down side, which is how said market structure is created. The market structure starts with a High, then we break the previous low and create a new low. What we wait for now is a lower high to form and then it is execution time, which we will talk about later.

 

Consolidation

During times of consolidation in the markets we will see that there is essentially no creation of HH or LL due to the market being in such a balanced state, an example is below.

EUR/USD 1hr

During times in the market of this nature, it is critical to be patient and understand this. The majority of traders win easily in trending markets by lose in times like this. One must wait for a fundamental reason to enter during this time or wait for a break and market structure to resume.

 

Breaking Market Structure

For markets to move up and down a break in market structure must occur. A Break in market structure occurs when the market begins to shift direction and break the previous HH and HL or HL and LL of the market. An example is shown below.

EUR/USD 1hr

The market is in a clear down trend creating a pattern of LH and LL, but at the bottom we have a last low. After that occurred we broke the previous LH, which for me is a great indicator (if follower by a HL, which it did) that the market is shifting. After we create a new high, that signals that the market has 100% shifted. After we have identified this you must be able to execute.

Execution

Market structure is not a trading strategy or set up, its is more of an understanding that allows you to be able to see how the overall market conditions are. The goal for executing with market structure is using it and having an understanding of it to be able to execute set ups including FTR, FTB, break out strategies off of and to different zones.

Conclusion

  • Bearish- LH and LL
  • Bullish- HL and HH
  • Consolidation= no HH or LL
  • Shifting- market switches from HH and HL to LH and LL
  • execution is based of begin able to capture the small waves between zones with the understanding of how the market structure is flowing.

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