Smart Risk Lecture: Understanding Market Structure

Introduction

• Goal: Accurately identifying and mapping market structure is crucial for trading success.
• Common Issue: Many traders face losses due to failure in identifying and understanding market structure.
• Content: Explores both basic and advanced concepts of market structure.

Dynamics of Market Movements

• Key Factors:
  • Trending: Includes uptrend and downtrend.
  • Consolidation Phase: Ranges or choppy markets where liquidity and institutional orders accumulate.
• Cycle: Price moves between downtrends, uptrends, and consolidations.

Identifying Market Phases

• Questions to ask:
  • Is the market in an uptrend?
  • Is it in a downtrend?
  • Is it in a consolidation phase?

Basic Market Structures

• Ideal Uptrend: Rare but essential for understanding; characterized by higher highs and higher lows.
  • Uptrend ends when a major low is broken.
  • Break of Structure (BOS): When price breaks a major high, forming a demand zone with BOS wave.
• Bearish Scenario: Similar concepts, with lower lows and lower highs.

Realistic Market Structures

• Realistic Uptrend:
  • Major High: Highest point before retracement.
  • Major Low: Lowest point before bullish wave starts.
  • Internal Structures: Formed between major highs and lows.
  • Trend Continuation: Price breaks major high to the upside.
  • Trend Reversal: Price falls below major low.
• Bearish Scenario: Similar, with lower lows and highs.

Advanced Concepts: Break of Structure (BOS)

• Valid BOS:
  • Price must break and close above recent high with candle body.
  • A long wick without body close does not count as BOS.
• Trend Reversal Signal: Break of newly regenerated major low.
• Internal Structures: Do not affect trend as long as price remains above major low.

Change of Character

• General Direction: Determine if in uptrend or downtrend.
• Valid Change of Character:
  • Must break and close below/above last major low/high with candle body.
  • A penetration with a wick is not valid.
• Minor vs. Major Change:
  • Minor change is insufficient for market shift.
  • Wait for a major change of character for confirmation.

Recommendations

• Backtesting: Conduct at least 100 backtests using tools like Trader Edge.

Conclusion

• Call to Action: Subscribe and provide feedback for future content.
• Key Takeaway: Proper identification and application of market structures are essential for successful trading.