Introduction to Market Structure in Trading

by | May 6, 2022

Market structure is a term used to describe the overall trend or nature of how a given asset’s price is moving. This ‘Price Action’ can usually be described as bullish, bearish, or ranging. Bullish MS means there is an uptrend, while bearish MS refers to a down trend. Ranging is just that- when price is very restricted by a high and low price where the price just remains in a constant struggle to find direction. 

[Side Note* Most traders will tell you that they despise trading ranging environments due to the lack of identifiable direction, while ranging price action is a scalper’s (short time frame trader) paradise.]

In order to identify market structure you must be able to chart support and resistance levels, swing highs, and swing lows.

Finding a trend, which is a consistent direction of price movement over any given time frame, is also necessary to help you visualize market structure correctly.

So why is Market Structure even worth learning?

It provides insight into order flow (where traders have placed their buy and sell orders) and gives us a better understanding of where price is likely to go next.

Bullish vs Bearish Market Structure

Bullish MS

(Higher highs and higher lows)

Bearish MS

(Lower highs and lower lows)

Using different timeframes to find the right structure

Higher time frames (HTF)

Higher time frames typically provide a less error-prone view of price action. It is much easier to feel confident in your identification of Market structure when you look at the 4h, daily, or 2-day time frames, since those levels are more clear and block out the choppy wick PA that can be seen in shorter time frames.

In general, most traders use HTF to help form their strategy, and look to lower time frames for confluence to find entry and exit triggers.

Always know what the trend is, and trade with it on HTF, or if going against it on LTf, be very aggressive and take profits quickly.

Lower time frames (LTF)

Much more “noisy” with a lot more swing points/wicks etc. LTF structures are internal movements in price that make up the HTF. 

Notice how the highlighted areas are within the larger scope of the price history or HTF? These LTF are subsections of the HTF and are still tradable as long as you take into account the bigger picture of which direction price is moving. 

Market structure breaks (MSB) examples:

By identifying the structure as bullish or bearish, you can make a reasonable expectation as to which direction the price is going to move. If in a bullish MS, when the price dips down, as long as it doesn’t break the previous low, one could assume it will pop up and make a higher high. 

Always remember that nothing is guaranteed, but traders use these signals to map out direction or breakdown reversals of price. 

Market structure is without a doubt one of the most important aspects of chart pattern recognition. Chart patterns are not mystical, they just represent trader sentiment in the market, use it wisely, and you will succeed.