Smart Risk Lecture Notes

Introduction

• Importance of accurately identifying and mapping market structure for trading success.
• Many traders lose due to the failure to understand market structure.
• This episode covers both basic and advanced concepts of market structure and tips for effective mapping.

Market Structure General Behavior

• Key factors influencing price direction:
  • Trending: Uptrends and downtrends.
  • Consolidation Phase: Choppy or ranging markets.
• Price moves between downtrends, uptrends, and consolidations that accumulate liquidity.
• Initial questions when analyzing charts:
  • Is the market in an uptrend, downtrend, or consolidation?

Basic Introduction to Market Structures

Ideal Uptrend

• Characteristics of an uptrend:
  • Prices form higher highs and higher lows.
  • Uptrend ends when price breaks a major low.
• Importance of identifying major highs and lows:
  • Signals for trend reversal or continuation.

Realistic Market Structure

• Real-world observation of uptrend:
  • Major high: Highest point before retracement.
  • Major low: Lowest point that initiated upward movement.
• Internal structures form between major highs and lows.
  • Market considered bullish as long as price remains above the most recent major low.

Bearish Scenario

• Characteristics of a downtrend:
  • Prices create lower lows and lower highs.
• Major high and low define the external structures.
  • Continuation of the trend is indicated by breaking major lows.

Break of Structure (BOS)

Valid Break of Structure

• A valid BOS occurs when:
  • Price breaks and closes above the most recent higher high with the candle body.
• Scenarios that don't indicate a valid BOS:
  • Breaks with long shadows or wicks that close below the previous high.
• Trend reversal signals:
  • Occur when price breaks the major low located at the extreme.

Bearish Break of Structure

• Valid when:
  • Price closes below the most recent lower low with the candle body.
• Important to distinguish between valid and invalid breaks based on candle closure.

Change of Character

Identifying Valid Change of Character

• Determine the general market direction before identifying valid BOS.
• Change of character patterns categorized into minor and major:
  • Minor changes do not indicate a market structure shift.
  • Major changes require breaking and closing below the last major low for bullish scenarios or above the last major high for bearish scenarios.

Common Mistakes by Traders

• Novice traders often misinterpret minor changes as reversals, leading to unnecessary positions.
• Valid change of character must meet specific criteria to avoid false signals.

Conclusion

• Emphasizes the need for proper analysis of market structures to avoid losses.
• Encourages feedback and suggestions for future video topics.
• Reminder to subscribe and stay updated.