How to Use Market Structure in Trading

Today, we are going to discuss the most important thing in your trading toolbox — market structure.

Table of Contents

  • What is the market structure?
  • How do I identify market structure?
  • How to Use Market Structure in Trading
  • Concluding statement

CMC Academy often explains various tools to help you improve your analysis and trading methods. Today, we’re going to discuss the most important item in your trading toolbox — market structure. Let’s dive into it!

What is the market structure?

Market Structure (MS) tells you the price direction of an asset using a zoomed-out view. Traders use it to analyze price behavior. Bullish, bearish and sideways/ranging are the three main types of market structure. A series of consecutive swing lows and highs, also known as swing points, is used to determine the type.

The chart below shows an example of identified swing points. A common belief is that a swing point (high or low) consists of a clear high or low, followed by two further highs or lows. To practice this, draw a chart and try to find some swing points!

How do I identify market structure?

Now that you know how to identify swing points, let’s look at ways to understand market structure. As discussed, market structure is defined by a series of successive swing points. When the price prints consecutive high highs and high lows, it is bullish. On the other hand, the market structure is bearish when consecutive lower highs and lows are printed.

The chart below shows a basic analysis of market structure. As you can see, an analysis looks at the turning point rather than each high and low. Practice and experience will teach you which areas to ignore and which areas to focus on. The purpose of analyzing market structure is to understand the overall direction of the market.

When there is an opposite picture (high lows and low highs at the same time, for example), the market is usually seen as a range market. The chart below is a concrete example, where no clear trend can be derived from the structure.

How to Use Market Structure in Trading

Market structure tells you the overall direction of the market. Understanding the trends can help you decide which positions to take, as it is usually easier to short in a downtrend. At the same time, longing often eases into an uptrend.
However, traders make most of the profit/loss when the structure changes. A new trend is established when a bullish market structure breaks down and becomes bearish. These trends last for a while — so, spotting these changes early can give you a great signal to trade.

The chart below shows a simple breakdown of the market structure. As you can see, the break occurs when the price crosses the latest highs, confirming that it is now stronger than ever. Highs aren’t necessarily lower than before, but can be an early signal to start paying attention.

Like any indicator or analysis, it can also provide false signals, where the market structure breaks down. When this happens, the previous trend often continues and may even accelerate.

Concluding statement

Overall, market structure is a very basic way to study price movements. It provides a clear picture of trend direction, as do moving averages. The advantage of studying MS is in intervals, which often confirm reversals.
Market structure can be analyzed on all timeframes, and may vary across timeframes. For example, a lower timeframe MS may be bullish, even if the higher timeframes are indicating a downtrend. The structure of a higher time frame market is usually clear. Moreover, breaks in these time frames are much more important than in shorter time frames.

Author’s Disclaimer: This article is based on my limited knowledge. This is for educational purposes only and should never be construed as advice in any shape or form.

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