What is market structure in trading?

Spread the love


What is market structure in trading?

The market system has been around for as long as financial markets. However, key principles are very important, especially for analyzing price movements and identifying trading opportunities.

Market structure serves as a guide to understand upward, downward and sideways trends. These same principles can be applied to any type of market, from stocks, futures, forex and commodities, to digital assets like cryptocurrencies or physical assets like real estate.

If you’re wondering why market structure is so relevant or how you can use it to trade, read on.

What is market structure?

Simply put, market structure refers to the structure or framework in which any market is currently trading. The structure of the market helps to understand the behavior, position and current flow of the market. It highlights support and resistance levels, swing highs and swing lows.

Market structure falls into three different categories: bullish, bearish, and sideways.

A bullish pattern is defined by high highs (HH) and high lows (HL). The trend continues in the same direction until the asset price registers low (LL).

A classic bullish pattern consists of low lows (LL) and low highs (LH). The price trend continues until a lower high (LH) is printed and a higher high (HH) is formed.

In a sideways market structure, the horizontal movement of price shows equal highs (EH) and equal lows (EL), also known as a sideways trend or sometimes referred to as a “chop”.

There are additional ways to define a market structure, including using candlesticks.

To confirm a trend, it is important to see the candles close above the previous high high (in an uptrend) or below the previous low low (in a downtrend).

It shows a continuation of buying when the price rises or a continuation of selling when the price falls.

If the price action is above the previous high but closes below, this shows weakness and could be an early sign of a reversal.

Price movement is often restricted within the limits of support and resistance levels. Price can cross these levels and move to other areas of support and resistance.

  • Support: A price level that stops a decline due to concentration of demand or buying interest. Support levels typically consist of a large number of buy orders in the order book from major market participants.
  • Resistance: A price level prevents the rise due to the exposure of a large number of sellers. There are high volume sell orders in the order book at resistance levels.

Why is market structure important in trading?

Market structure is important for new and professional traders as it can affect the market’s liquidity and price action. It is one of the most commonly used techniques to understand trends, spot potential reversal points, and sense current market conditions.

Because market structure is a two-way bidding process and a reflection of psychological changes in market sentiment, it provides incredible insight into how the market works. It can provide important clues as to where the price action will go next.

Market structure also helps create efficient markets (asset prices reflect all available information). Market makers play a major role in this and provide liquidity to ensure smooth transactions.

How to use market structure

Market structure can help define if-then scenarios. For example, If A structural breakdown occurs, After Look to get a pull short.

“Trend is your friend” is one of the most popular expressions in the business world, and for good reason. If you use market structure to identify a trend, more often than not, price will continue in the same direction going forward.

This is because there are already buyers (in a bullish trend). Aggressive sellers must enter the market to reverse the trend. A significant amount is required not only to stop the current momentum but also to change the direction.

As in turning a speeding car, energy brings the car to a stop (braking). Then, the car needs more energy to travel in the opposite direction (reversing).

Different types of market structures are popular trading patterns such as head and shoulders, inverse head and shoulders, double bottoms and double tops. They can indicate trend breaks or trend continuation.

Patterns should never be used in isolation. As a trader, you always need to understand how the method fits into the context of the current market and order flow. Just because a method is developed doesn’t mean it will work as expected.

Which assets perform best with the market structure?

High liquidity, large number of participants and large volume of assets and trading instruments have a smooth and clear market structure. Forex, futures, bonds and stocks are best suited for market structure analysis.

The following market structure example is taken from the EUR/USD forex market and has a well-defined bullish structure:

Small stocks and some low-cap cryptocurrencies may not have enough liquidity to create a clean market structure, especially in lower time frames.

What is the best timeframe to identify market structure?

Market structure appears in all time frames and different time frames often show different market structures.

For example, while the overall market structure is bullish on the higher timeframe, as the market pulls back, the lower timeframe structure may be in the current downtrend, waiting for an influx of buyers to continue the higher timeframe move.

Higher volume is represented in higher time frames, which means more market participants and more reliable sentiment. This generally results in a stable market structure.

In shorter time frames, the market structure is often less predictable and can be cut from highs to lows.

The best approach is to have a clear understanding of the market as a whole. This includes understanding the short term, medium term and longer time frame structure. Think about how each phase works together.

Time frame Vol Market structure Business style
Low Low Difficult to identify (chop) Scalping and day trading
Medium Medium Somewhat recognizable Day trading and swing trading
High High Easy to identify Swing trading

Trading systems using a market structure

Market structure is not a trading strategy or a specific system. This is a high-level concept that allows you to identify and understand overall market conditions.

You can use it to help with trade entries or more importantly, set invalid positions and let you know when you’re wrong. You can also manage trades and babysitting positions using market structure principles.

  • Withdrawal or Withdrawal: When the market is in an uptrend or downtrend, this pattern indicates that the price will pull back and collect orders, producing a candle in the opposite direction before resuming the trend.

  • Structure Capture: It is basically a retracement of the previous retracement and then a continuation of the prevailing trend. This can cause problems for traders who expect the market to reverse. Notice how the trend remains the same. Neither low lows (in a bullish example) nor high highs (in a bearish example) are made.

  • Continuation: This is a bullish or bearish structure where the price forms a short consolidation or base before pushing higher. During the base period, traders re-accumulate or redistribute their position in anticipation of the next rally or decline. It can form a triangle or pennant shape.


Market structure not only gives you a clear overview of current market conditions and trends, but also helps you identify support and resistance levels.

When using market structure to find support and resistance, look to the left and identify areas that have consistently appreciated over time. If multiple tests are performed at the same level, the level is more likely to be revalued.

Looking at the historical order book and identifying consistent resting liquidity can be a more reliable approach to identifying support and resistance levels. It removes the guesswork by displaying actual rest orders from other traders.

Another advantage of using a market structure in trading is that the market combines the collective wisdom of many participants, weighting it according to the volume of trades they make and allowing analysts to understand collective sentiment.

Market structure has the advantage of defining when and at what price to buy and sell through trendlines and price target targets, which has a significant advantage. After determining and marking the boundaries of possible formation, these boundaries correspond to a specific price and time coordinates that can be used to develop specific trading and risk control strategies.


Remember that the market can do anything at any time. The uncertainty of the market must be accepted and embraced. Although market structure can provide clues, there are no guarantees and it only takes one significant aggressive buyer or seller to break the trend.

Market structure principles may seem very simple, but the intricate details can take years to master.

Combine order flow with market structure to maximize your margin

Basic candlestick charts can only tell you about market structure. To really understand the ebb and flow of the market you need to understand order flow.

Without it, you’re trading in the dark. This is where BookMap comes in. Our state-of-the-art platform allows you to visualize a historical order book, view major market participants, identify trapped traders and make real-time decisions.

Learn more about BookMap’s subscription plans Here.

When individuals think about Reddit shares, it’s no surprise Gamestop (NYSE:GME) And AMC Entertainment (NYSE:AMC) comes to mind. These two stocks were the poster children of the “meme stock” movement in 2021. They are not alone. Many speculative stocks are popular in the social media forum.

However, the Reddit community is interested in more than just low-priced stocks. To be clear, penny stocks still attract a lot of interest from the Reddit crowd. But it is a diverse group of investors. Actually, many Trending reddit shares Companies that are in the portfolios of many retail and institutional investors.

That’s why it’s worth paying attention to popular stocks among Reddit investors. That is the purpose of this presentation. Here are seven stocks that look like great investment picks for 2023. All of these stocks currently have consensus analyst ratings of Hold or Outperform.

Check out the stock here .


Source link

Leave a Comment