Learning to Understand Market Structure

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Video Transcript:

Hello, traders. Welcome to the Advanced Technical Analysis Course. The first module, Technical Analysis 101. On this lesson, we’re going to teach you how to learn and how to understand market structure. This is very important and it is, in fact, the most important thing about technical analysis.

What is market structure, guys? Market structure gives us bias to look for trading opportunities, if you don’t understand the market structure, we are basically technical analysts that don’t understand technical analysis. This is because understanding market structure is the very core of understanding the way the market moves and how cycles interact with each other.

For example, in a bull market, we always look to buy dips. If you don’t understand market structure, we will never understand that we are in a bull market and maybe we will be looking to buy puts in a bull market, which is a no. In a bear market, we always look to sell rallies. In a bear market, you sell into strength. In a bull market, you buy into weakness. This is how you trade. This is how trade is made simple. You follow the trend and you buy into weakness and you sell into strength, but you need to understand what is market structure.

Also market structure gives you market directionality. This is what we already said. The bull market, price is making higher highs and lower lows. This is the basic market structure of a bull move. In a bear market, price is making lower highs and lower lows. This is the basic structure in a bear move.

In between these bull and bear moves, we have cycles that interact with each other. Market cycles are shifts between bull and bear moves, because remember, guys, that even if we are in a bull move, we are going to have retracements off that bull because we are making higher highs and higher lows. We need to make a low, so we need to retrace a little bit. When we retrace a little bit in a bull market or in a bull move, we are going to break with the immediate market structure.

Let’s have a look at this. In an overall market, in an overall bull market, a retracement would mean a break of the immediate structure for a bear cycle. This doesn’t mean that we are going to sell that top and to short it right there. This means that we are going to wait for the bear cycle to finish for us to be able to buy that dip.

Bullish and bearish breakouts

It’s the same thing for a bear move. On a correction, we break immediate market structure for a bull cycle. Why are we saying that we break immediate market structure? This is easy, guys, because when we are in a bull market, we are making higher highs and higher lows. When we retrace, we break with the immediate low. In a bear market, when we retrace, we break with the immediate high. We are going to go through charts, so you better understand these later on the lesson.

Now the first thing we are going to do is to determine market direction in a bullish market or a bearish market. It all depends what time frame you are looking at. If you are looking at a daily chart and price is making higher highs and higher lows, we are in a bull market. If we look at a retracement of that move on a 30-minute chart, we might be in a short-term bear market even though the overall bull is bullish.

To make this simple, on a higher time frame like the daily or the weekly chart, we might be in a very strong bullish trend or in a very strong bullish move. If we go to a 30-minute chart or a 50-minute chart even on a correction of that bull move, we might be looking at an immediate bear market or a short-term bear market. It depends on what time frame you are trading on and what time frame you are analyzing price action on.

Perspective is everything here when it comes to market structure. It is important to know the overall sentiment always, even if we trade the lower time frame. Even if you trade the 50-minute chart and you like to scalp for a 30, 40 pip win, you need to understand the overall market structure because you might be countertrend trading. If you are countertrend trading, you might want to have tighter stops or take profit faster because you not trading with the overall trend.

Now we have sometimes bullish and bearish breakouts. This is what it all comes out. Understanding market structure is not everything. Whenever market structure breaks, our bias has to change with it. This means that if we are in a bear market, we are going to try and sell rallies or sell into strength. When we are in a bull market, we are going to try buy dips or buy into weakness. When we break with the structure, our bias must change. If we are in a bearish market and we break with a bearish structure, it will mean then we are now in a bullish market and we are no longer trying to shorten the market but to go long.

Here is an example. As you can see here, we are making lower highs and lower lows. We have this trend that is respected. This would have been a great opportunity to shorten the market. You can see here that we are in a very bearish move and we’ll retrace back to these levels. When these levels are rejected, we have a very good, short opportunity. You could draw a trend line and you can actually think that market structure has shift or the bearish structure, in this case, has been broken because we broke with the trend line.

The exact point where this structure is broken with is when we break with this high. You know that we broke with these highs and these highs. The most important high is right here. Why? Because this is the deepest retracement we got on the bearish move. When we break with this high, you know that we are now in a bull market and we can continue to buy calls.

In this case, when we retrace back to this level of support that was tested before, we have a great opportunity to buy calls. Of course you can go long here on the breakout of the immediate structure. If you are trading on the longer term, you have to wait for our confirmation that, in fact, the bearish structure has been broken.


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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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