Understanding Market Structure in Trading

Hello traders and welcome back to another episode of Smart Risk. Accurately identifying and mapping the market structure, along with its crucial elements, is the initial key step that every trader must take on their trading journey for success and profitability. One of the primary reasons many traders face losses is their failure to properly identify and understand the market structure. In this episode, we explain both advanced and basic concepts of market structure. that are essential for every trader to understand and apply in their trading journey. Additionally, we will unveil the keys and tips for market structure mapping, propelling you one step ahead in the market. Be sure to watch the entire video slowly until the end and take notes for a better and more comprehensive understanding. So, traders, if that's something you're interested in, please give this video a thumbs up to show your support and subscribe to our channel if you are new. See you after intro. Welcome back traders, so let's get started with the market structure general behavior. The dynamics behind market movements can be boiled down to two key factors that consistently influence price direction. Trending, which includes uptrend and downtrend, and the second factor is the consolidation phase, like a choppy or ranging market. Imagine it like a continuous circle where price always moves between downtrends, uptrends, and also consolidations that accumulate liquidity and institutional orders. Price usually needs to consolidate between uptrends and downtrends and vice versa. The first question to consider when opening charts on your screen is whether the market is in an uptrend, downtrend, or consolidating phase. To gain a solid understanding, let's begin with a basic introduction to market structures. and then delve into the key points of advanced market structures. Consider a market structure that represents an ideal uptrend. I refer to this type of market structure as ideal because it is rare to find an uptrend in the market that exactly mirrors this pattern. Prices typically do not behave with such simplicity. Nonetheless, for a clearer understanding of an uptrend, let's briefly take a look at this ideal structure before moving on to a more realistic uptrend structure. that frequently emerges in the market. In an uptrend, prices consistently form higher highs and higher lows. The price typically breaks the previous highs while holding the lows. An uptrend ends when the price breaks one of the major lows to the downside. For example, to maintain the uptrend, it's crucial that price does not break this major low. Whenever the price breaks a major high to the upside, it forms a break of structure and establishes a demand zone associated with the BOS wave. Identifying valid major highs and lows is critical as it enables us to detect signals for a trend reversal or continuation in the market. Without proper identification of these pivotal points, there is a risk of falling into traps and trading on the wrong side of the market. The same concepts apply to the bearish scenario. In a downtrend, prices consistently create a series of lower lows and lower highs. In this scenario, the price has a tendency to break the previous lows while maintaining the highs. Now, let's delve into the details of the realistic market structure. This represents the realistic uptrend structure that is more commonly observed in the market. Now let's consider a scenario where the price breaks the previous highs to the upside. At this point, a crucial question arises. How do we identify valid major highs and lows? To address this, if we look at the left side of the structure, It is clear that price experienced an upward movement until it started to retrace. The highest point reached by the price before the retracement movement began is considered the major high. Additionally, the lowest point of the bullish wave that initiated the upward movement, leading to the formation of a break of structure and a new high, is recognized as the major low. These two points constitute the major external structures, and every structure formed between them is regarded as an internal structure. If the price breaks the major high to the upside, creating a break of structure, BOS, it signals a continuation of the trend. However, if the price falls below the major low, we should consider it as a trend reversal signal. The specific internal price action within the range of external structures doesn't matter. As long as the price remains above the most recent major low, as long as this condition is met, we consider the market to be in a bullish state. now that we've identified the recent major external structures these structures define the current area of interest and the current trading range as we see the price has entered the retracement phase generating a series of internal structures particularly bearish ones Subsequently, after forming a bullish internal realignment, the price breaks the recent major high to the upside, establishing a fresh major high and low. The newly generated major low is this internal low situated at the extreme. This low is considered major because it is the last low created before the price initiated an upward movement leading to the break of structure. You might be wondering why we don't regard this low structure as the major low. The rationale behind this is that the low located at the extreme is the ultimate and lowest point before the price initiates an upward movement. This particular low is crucial as it is the key low that triggered the upward movement, and subsequently the break of structure, moving on to the bearish scenario, which is simply just the same as the bullish scenario, initiating the bearish wave leading to a break of structure. Additionally, we have a major low. marking the lowest point the price reached after the break of structure. These two structures, the major high and low, constitute our external structures, while everything formed between them is considered internal structures. If the price breaks the major lows to the downside, creating a break of structure, it signals a continuation trend like what we see here. However, if the price rises above the major high, we should consider it as a trend reversal signal. In simpler terms, The nature of internal price action within the external structures doesn't matter, as long as the price remains below the most recent major high, indicating a bearish market. As the price retraced upward, it formed a series of internal highs and lows within our trading range. However, it eventually went back down and broke the recent major low to the downside. This internal high located at the extreme becomes our newly generated major high. This is because it represents the highest internal high created, before the price initiated a strong bearish push, resulting in a new break of structure. Following this, the price retraced once more, forming another major low. Subsequently, after creating various internal structures, the price continued its downward momentum, establishing a sequence of lower lows and lower highs. Now, we will delve into another crucial aspect of market structure, the break of structure, BOS. You've likely encountered BOS in various trading tutorials, market structure videos, and trading handbooks. For example, in a bullish structure is often defined simply as a situation where the price breaks a high to the upside. However, in reality, there are specific rules and key points that we must consider to identify a valid break of structure. Now let's move on to the specifics of those key points and rules. A valid break of structure occurs when the price breaks and closes above the most recent higher high with the body of a candle. This holds true even if the price immediately moves downward after breaking the structure. In this scenario, the price generates a new major low and major high and establishes a new trading range. If the price subsequently breaks this newly regenerated major low to the downside, it indicates a potential trend reversal. This shift signals that the price is no longer bullish, marking a change of character. However, if price breaks the recent higher high with a long shadow or wick, and the body of the candle promptly closes below the range of the high, with the subsequent candle's wick not surpassing the first candle's wick, we do not consider this scenario a valid break of structure. In this case, we regard this low as an internal structure formed inside our trading range. To identify a trend reversal signal or a valid change of character, we should wait for the price to break the major low located at the extreme. rather than breaking the upper internal high. Now consider another scenario. If the price breaks the recent higher high with a wick, and then the body of the first candle closes below the range of the high, with the subsequent candle's wick exceeding the first candle's wick, we can consider it a valid bullish break of structure. In this case, we have a newly formed major high and a major low defining our updated trading range. The nature of internal price action within the range of this high and low doesn't matter, as long as the price remains above our newly generated major low, indicating a bullish market. Only if the price breaks the newly formed low to the downside, we can consider it a valid trend reversal signal or a valid change of character pattern. Now let's briefly break down the bearish scenario, which is essentially the same as the bullish one. Before using a strategy or setup in a real account, It's recommended to backtest it at least 100 times. To help you with this critical step, we use the Trader Edge platform for backtesting our exclusive trading strategies and setups. If you're interested in using Trader Edge as your backtesting tool, be sure to check out the link in the description below. Consider a bearish market structure. To have a valid break of structure, we require the price to break and close below the most recent lower low with the body of a candle. Therefore, if the price breaks the newly generated major high to the upside, we consider it as a trend reversal signal, indicating that sellers have lost control. Conversely, if the price breaks the recent lower low with a long shadow or a wick, and the body of the candle promptly closes above its range with the subsequent candle's shadow not surpassing the first candle's wick we should not regard it as a valid break of structure to establish a genuine bearish break of structure we should wait for the price to close below the low's range with the body of a candle on the other hand if the subsequent candle's wick exceeds the first candle's wick and closes above the low's range then we have a valid break of structure additionally we need to update our major low and major high. As long as the price remains below our newly generated major high, we consider the market's direction as bearish. Only if the price breaks the newly formed high to the upside, we are allowed to consider it a valid trend reversal signal or a major change of character. Having explored various types and scenarios of break of structure patterns, and now possessing a solid understanding of a valid BOS, let's delve into another key factor of market structure mapping, change of character. To identify a valid change of character, the first step involves determining the general market direction, whether it's in an uptrend or downtrend. Subsequently, you must highlight the valid break of structures on your price chart. In the bullish scenario, imagine the price creating a series of valid break of structures. This low and high represent our major structures associated with the first valid bullish BOS. As previously mentioned. any price action forming between these two structures is considered internal. Change of character patterns can be categorized into two types, minor and major. For example, each time the price breaks any internal low, it signifies a minor change of character. It's important to note that a minor change of character alone cannot be regarded as a sign of a shift in the market structure. Here, we're facing a common scenario that frequently occurs in the market. Many novice traders who haven't correctly identified the market structure often consider this minor change of character a signal of a reversal in market direction they believe that the bullish phase has ended and it's an ideal time to go short they typically place their stop loss just above this internal high however contrary to their expectations price after making a brief retracement went back up and continued its bullish movement this resulted in hitting the stop loss of traders who had taken short positions They often fail to realize why their stop loss was triggered by the price, and unfortunately, they repeat these actions repeatedly. What they missed here is a crucial point. The price didn't break this major low over here to confirm a market structure shift. They shouldn't have entered a short position until the price broke the last major low to the downside. Their identified change of character was invalid, and the price only was in its retracement phase before continuing to its primary direction. To obtain a valid market structure shift signal, one should patiently wait for the price to establish a major change of character by breaking and closing below the last major low that initiated the upward movement, leading to the bullish break of structure. Furthermore, it's crucial to always remember that in a bullish scenario, a change of character pattern is considered valid only when the price breaks and closes below the last major low with the body of a candle. If the price breaks the most recent structure with a long wick or shadow and closes within the high's range, then the change of character is invalid, and we cannot consider it a market structure shift. The same concept applies to the bearish scenario. For a valid change of character that provides a high probability, we need the price to break and close above the recent major high with the body of a candle. A penetration with a shadow or wick is not acceptable. That's it, traders. Thank you for watching this video. I hope you found it informative and useful. Don't forget to hit the subscribe button and turn on notifications to stay updated on our latest videos. We value your feedback and suggestions, so please leave your comments below and let us know what topics you'd like us to cover in our future videos. We appreciate your support and look forward to seeing you in the next episode.

In this episode, we explain both advanced and basic concepts of market structure. that are essential for every trader to understand and apply in their trading journey. Additionally, we will unveil the keys and tips for market structure mapping, propelling you one step ahead in the market. Be sure to watch the entire video slowly until the end and take notes for a better and more comprehensive understanding.

So, traders, if that's something you're interested in, please give this video a thumbs up to show your support and subscribe to our channel if you are new. See you after intro. Welcome back traders, so let's get started with the market structure general behavior. The dynamics behind market movements can be boiled down to two key factors that consistently influence price direction.

Trending, which includes uptrend and downtrend, and the second factor is the consolidation phase, like a choppy or ranging market. Imagine it like a continuous circle where price always moves between downtrends, uptrends, and also consolidations that accumulate liquidity and institutional orders. Price usually needs to consolidate between uptrends and downtrends and vice versa. The first question to consider when opening charts on your screen is whether the market is in an uptrend, downtrend, or consolidating phase.

To gain a solid understanding, let's begin with a basic introduction to market structures. and then delve into the key points of advanced market structures. Consider a market structure that represents an ideal uptrend. I refer to this type of market structure as ideal because it is rare to find an uptrend in the market that exactly mirrors this pattern. Prices typically do not behave with such simplicity.

Nonetheless, for a clearer understanding of an uptrend, let's briefly take a look at this ideal structure before moving on to a more realistic uptrend structure. that frequently emerges in the market. In an uptrend, prices consistently form higher highs and higher lows. The price typically breaks the previous highs while holding the lows. An uptrend ends when the price breaks one of the major lows to the downside.

For example, to maintain the uptrend, it's crucial that price does not break this major low. Whenever the price breaks a major high to the upside, it forms a break of structure and establishes a demand zone associated with the BOS wave. Identifying valid major highs and lows is critical as it enables us to detect signals for a trend reversal or continuation in the market. Without proper identification of these pivotal points, there is a risk of falling into traps and trading on the wrong side of the market.

The same concepts apply to the bearish scenario. In a downtrend, prices consistently create a series of lower lows and lower highs. In this scenario, the price has a tendency to break the previous lows while maintaining the highs. Now, let's delve into the details of the realistic market structure. This represents the realistic uptrend structure that is more commonly observed in the market.

Now let's consider a scenario where the price breaks the previous highs to the upside. At this point, a crucial question arises. How do we identify valid major highs and lows?

To address this, if we look at the left side of the structure, It is clear that price experienced an upward movement until it started to retrace. The highest point reached by the price before the retracement movement began is considered the major high. Additionally, the lowest point of the bullish wave that initiated the upward movement, leading to the formation of a break of structure and a new high, is recognized as the major low.

These two points constitute the major external structures, and every structure formed between them is regarded as an internal structure. If the price breaks the major high to the upside, creating a break of structure, BOS, it signals a continuation of the trend. However, if the price falls below the major low, we should consider it as a trend reversal signal.

The specific internal price action within the range of external structures doesn't matter. As long as the price remains above the most recent major low, as long as this condition is met, we consider the market to be in a bullish state. now that we've identified the recent major external structures these structures define the current area of interest and the current trading range as we see the price has entered the retracement phase generating a series of internal structures particularly bearish ones Subsequently, after forming a bullish internal realignment, the price breaks the recent major high to the upside, establishing a fresh major high and low. The newly generated major low is this internal low situated at the extreme.

This low is considered major because it is the last low created before the price initiated an upward movement leading to the break of structure. You might be wondering why we don't regard this low structure as the major low. The rationale behind this is that the low located at the extreme is the ultimate and lowest point before the price initiates an upward movement.

This particular low is crucial as it is the key low that triggered the upward movement, and subsequently the break of structure, moving on to the bearish scenario, which is simply just the same as the bullish scenario, initiating the bearish wave leading to a break of structure. Additionally, we have a major low. marking the lowest point the price reached after the break of structure. These two structures, the major high and low, constitute our external structures, while everything formed between them is considered internal structures. If the price breaks the major lows to the downside, creating a break of structure, it signals a continuation trend like what we see here.

However, if the price rises above the major high, we should consider it as a trend reversal signal. In simpler terms, The nature of internal price action within the external structures doesn't matter, as long as the price remains below the most recent major high, indicating a bearish market. As the price retraced upward, it formed a series of internal highs and lows within our trading range.

However, it eventually went back down and broke the recent major low to the downside. This internal high located at the extreme becomes our newly generated major high. This is because it represents the highest internal high created, before the price initiated a strong bearish push, resulting in a new break of structure. Following this, the price retraced once more, forming another major low. Subsequently, after creating various internal structures, the price continued its downward momentum, establishing a sequence of lower lows and lower highs.

Now, we will delve into another crucial aspect of market structure, the break of structure, BOS. You've likely encountered BOS in various trading tutorials, market structure videos, and trading handbooks. For example, in a bullish structure is often defined simply as a situation where the price breaks a high to the upside.

However, in reality, there are specific rules and key points that we must consider to identify a valid break of structure. Now let's move on to the specifics of those key points and rules. A valid break of structure occurs when the price breaks and closes above the most recent higher high with the body of a candle.

This holds true even if the price immediately moves downward after breaking the structure. In this scenario, the price generates a new major low and major high and establishes a new trading range. If the price subsequently breaks this newly regenerated major low to the downside, it indicates a potential trend reversal. This shift signals that the price is no longer bullish, marking a change of character.

However, if price breaks the recent higher high with a long shadow or wick, and the body of the candle promptly closes below the range of the high, with the subsequent candle's wick not surpassing the first candle's wick, we do not consider this scenario a valid break of structure. In this case, we regard this low as an internal structure formed inside our trading range. To identify a trend reversal signal or a valid change of character, we should wait for the price to break the major low located at the extreme. rather than breaking the upper internal high. Now consider another scenario.

If the price breaks the recent higher high with a wick, and then the body of the first candle closes below the range of the high, with the subsequent candle's wick exceeding the first candle's wick, we can consider it a valid bullish break of structure. In this case, we have a newly formed major high and a major low defining our updated trading range. The nature of internal price action within the range of this high and low doesn't matter, as long as the price remains above our newly generated major low, indicating a bullish market. Only if the price breaks the newly formed low to the downside, we can consider it a valid trend reversal signal or a valid change of character pattern. Now let's briefly break down the bearish scenario, which is essentially the same as the bullish one.

Before using a strategy or setup in a real account, It's recommended to backtest it at least 100 times. To help you with this critical step, we use the Trader Edge platform for backtesting our exclusive trading strategies and setups. If you're interested in using Trader Edge as your backtesting tool, be sure to check out the link in the description below.

Consider a bearish market structure. To have a valid break of structure, we require the price to break and close below the most recent lower low with the body of a candle. Therefore, if the price breaks the newly generated major high to the upside, we consider it as a trend reversal signal, indicating that sellers have lost control. Conversely, if the price breaks the recent lower low with a long shadow or a wick, and the body of the candle promptly closes above its range with the subsequent candle's shadow not surpassing the first candle's wick we should not regard it as a valid break of structure to establish a genuine bearish break of structure we should wait for the price to close below the low's range with the body of a candle on the other hand if the subsequent candle's wick exceeds the first candle's wick and closes above the low's range then we have a valid break of structure additionally we need to update our major low and major high. As long as the price remains below our newly generated major high, we consider the market's direction as bearish.

Only if the price breaks the newly formed high to the upside, we are allowed to consider it a valid trend reversal signal or a major change of character. Having explored various types and scenarios of break of structure patterns, and now possessing a solid understanding of a valid BOS, let's delve into another key factor of market structure mapping, change of character. To identify a valid change of character, the first step involves determining the general market direction, whether it's in an uptrend or downtrend.

Subsequently, you must highlight the valid break of structures on your price chart. In the bullish scenario, imagine the price creating a series of valid break of structures. This low and high represent our major structures associated with the first valid bullish BOS.

As previously mentioned. any price action forming between these two structures is considered internal. Change of character patterns can be categorized into two types, minor and major. For example, each time the price breaks any internal low, it signifies a minor change of character. It's important to note that a minor change of character alone cannot be regarded as a sign of a shift in the market structure.

Here, we're facing a common scenario that frequently occurs in the market. Many novice traders who haven't correctly identified the market structure often consider this minor change of character a signal of a reversal in market direction they believe that the bullish phase has ended and it's an ideal time to go short they typically place their stop loss just above this internal high however contrary to their expectations price after making a brief retracement went back up and continued its bullish movement this resulted in hitting the stop loss of traders who had taken short positions They often fail to realize why their stop loss was triggered by the price, and unfortunately, they repeat these actions repeatedly. What they missed here is a crucial point. The price didn't break this major low over here to confirm a market structure shift.

They shouldn't have entered a short position until the price broke the last major low to the downside. Their identified change of character was invalid, and the price only was in its retracement phase before continuing to its primary direction. To obtain a valid market structure shift signal, one should patiently wait for the price to establish a major change of character by breaking and closing below the last major low that initiated the upward movement, leading to the bullish break of structure.

Furthermore, it's crucial to always remember that in a bullish scenario, a change of character pattern is considered valid only when the price breaks and closes below the last major low with the body of a candle. If the price breaks the most recent structure with a long wick or shadow and closes within the high's range, then the change of character is invalid, and we cannot consider it a market structure shift. The same concept applies to the bearish scenario. For a valid change of character that provides a high probability, we need the price to break and close above the recent major high with the body of a candle.

A penetration with a shadow or wick is not acceptable. That's it, traders. Thank you for watching this video. I hope you found it informative and useful. Don't forget to hit the subscribe button and turn on notifications to stay updated on our latest videos.

We value your feedback and suggestions, so please leave your comments below and let us know what topics you'd like us to cover in our future videos. We appreciate your support and look forward to seeing you in the next episode.

Transcript for:Understanding Market Structure in Trading

Transcript for:
Understanding Market Structure in Trading