Overview
This lecture explains the concept of "break of structure" in trading, showing how to identify trend reversals using candlestick patterns and emphasizing the importance of candle closures over wicks.
Understanding Trends and Structure
- An uptrend is defined by higher highs and higher lows on the chart.
- A downtrend is defined by lower lows and lower highs.
- A "high" forms when there is a move up followed by a move down (two candles).
- A "low" forms when there is a move down followed by a move up (two candles).
- The highest wick of the two candles forming a high marks the high; the lowest wick marks the low.
What is Break of Structure?
- Break of structure means a trend has shifted direction.
- In an uptrend, a break of structure occurs when the candle body closes below the most recent low.
- In a downtrend, a break of structure occurs when the candle body closes above the most recent high.
- Wick movements above highs or below lows do NOT signal break of structure; only candle closures count.
Identifying Break of Structure: Step-by-Step
- Identify the current trend (uptrend or downtrend).
- If in uptrend, focus on the most recent lows; a close below a low signals break of structure.
- If in downtrend, focus on the most recent highs; a close above a high signals break of structure.
- Ignore older highs/lows once more recent ones have formed.
- During consolidation (no clear trend), breaks of structure are not present.
Common Mistakes and Clarifications
- Do not mistake wick breakouts for break of structure.
- Wait for actual candle closure for confirmation.
- Higher time frame trends (weekly/monthly) have more influence than lower time frame trends.
Key Terms & Definitions
- Break of Structure — A confirmed trend reversal marked by a candle closing past the most recent high or low.
- High — Formed by a move up then a move down (highest wick of two candles).
- Low — Formed by a move down then a move up (lowest wick of two candles).
- Wick — The thin line on a candlestick showing the highest or lowest price reached.
- Candle Closure — The finalized end of a candlestick indicating a confirmed price level.
Action Items / Next Steps
- Find and mark 10 real examples of break of structure in the market.
- Find and mark 10 fake examples (where only wicks break but not candle closures).
- Complete 20 total examples before the next video.