Market Structure in Trading

<p>Knowing when <span>to buy and sell in trading depends largely on current market conditions. One way to study these conditions is through market structure.</p>
<p><span>At its core, market structure helps you analyse what is behind price movements. It involves identifying trends, momentum and key support and resistance levels through the analysis of historic prices. This understanding can be applied to all different kinds of markets, from stocks, futures, forex, and commodities, to digital assets like cryptocurrencies.</p>
<p><span>In this guide we will explore how market structure affects trading activity, giving you a deeper insight into how financial markets work.</p>
<h2><span>Understanding Market Structure</h2>
<p><span>The laws of supply and demand play a major role in price movement in the financial markets &#8211; especially in the Forex market. This is due to the fact that prices are determined by the number of buyers and sellers that interact within a given timeframe. When there is an excess of buyers, prices will tend to rise until enough sellers enter the market to balance the equation. The same logic applies to a fall in prices when there is an excess of sellers.</p>
<p><img decoding="async" title="" src="https://www.keytomarkets.com/blog/images/image5.png" alt="" /><img decoding="async" loading="lazy" class="aligncenter size-large wp-image-24552" src="https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image5-1-1024×478.png" alt="" width="680" height="317" srcset="https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image5-1-1024×478.png 1024w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image5-1-300×140.png 300w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image5-1-768×359.png 768w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image5-1-1536×717.png 1536w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image5-1.png 1814w" sizes="(max-width: 680px) 100vw, 680px" /></p>
<p><span>Source: TradingView</p>
<p><span>As traders, it is our job to identify these waves and understand where price will go next based on our analysis of the current market conditions. To do this we need to study the past path of least resistance formed by supply and demand.</p>
<p><span>So far, we have established that the market moves based on the interaction of buyers(demand) and sellers(supply), giving rise to market structure and ever-changing market prices.</p>
<p><span>But what does this look like in reality? To answer this, we need to know the different types of market structures that exist.</p>
<h2><span>Types of Market Structure</h2>
<p><span>There are 3 main types of market structure observed in trading:</p>
<ol start="1">
<li><span>Bullish (Uptrend)</li>
<li><span>Bearish (Downtrend</li>
<li><span> and Sideways(Ranges</li>
</ol>
<h3><span>1 Bullish Markets</h3>
<p><span>Bullish markets are characterised by an upward trend. During this period, buyers have the upper hand as they continue to buy at higher prices, causing a steady rise in the price chart. This is caused by the increase in demand that outweighs the supply of the asset and thus pushes prices up. As such, bullish markets are typically more attractive to traders who seek to profit from rising prices by taking long positions.</p>
<p><img decoding="async" title="" src="https://www.keytomarkets.com/blog/images/image2.png" alt="" /><img decoding="async" loading="lazy" class="aligncenter size-large wp-image-24543" src="https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image2-6-1024×478.png" alt="" width="680" height="317" srcset="https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image2-6-1024×478.png 1024w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image2-6-300×140.png 300w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image2-6-768×359.png 768w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image2-6-1536×717.png 1536w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image2-6.png 1814w" sizes="(max-width: 680px) 100vw, 680px" /></p>
<p><span>Source: TradingView</p>
<p><span>It is typically characterised by higher highs(HH) and higher lows(HL) meaning that price consistently makes a higher peak and Low than the previous one.</p>
<h3><span>2 Bearish Markets</h3>
<p><span>On the flip side, bearish markets are when sellers hold the reins, causing a steady decline in prices. This happens when the supply of an asset increases relative to its demand, leading to decreased prices as buyers become scarce. Traders who try to profit from this type of market typically take short positions with expectations that price will fall further.</p>
<p><img decoding="async" title="" src="https://www.keytomarkets.com/blog/images/image4.png" alt="" /><img decoding="async" loading="lazy" class="aligncenter size-large wp-image-24549" src="https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image4-1-1024×478.png" alt="" width="680" height="317" srcset="https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image4-1-1024×478.png 1024w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image4-1-300×140.png 300w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image4-1-768×359.png 768w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image4-1-1536×717.png 1536w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image4-1.png 1814w" sizes="(max-width: 680px) 100vw, 680px" /></p>
<p><span>Source: TradingView</p>
<p><span>Bearish markets are usually characterised by lower highs (LH) and lower lows (LL), meaning that price makes a lower High and Low than the previous one.</p>
<h3><span>3 Ranges</h3>
<p><span>Finally, sideways or range-bound markets occur when there is neither an uptrend nor a downtrend but rather a period of consolidation where neither buyers or sellers have control over the price movement. Think of this as a tug of war where both buyers and sellers meet at the same level, causing prices to move back and forth between support and resistance levels.</p>
<p><img decoding="async" title="" src="https://www.keytomarkets.com/blog/images/image1.png" alt="" /><img decoding="async" loading="lazy" class="aligncenter size-large wp-image-24540" src="https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image1-7-1024×478.png" alt="" width="680" height="317" srcset="https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image1-7-1024×478.png 1024w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image1-7-300×140.png 300w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image1-7-768×359.png 768w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image1-7-1536×717.png 1536w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image1-7.png 1814w" sizes="(max-width: 680px) 100vw, 680px" /></p>
<p><span>Source: TradingView</p>
<p><span>The support level is a price level that tends to hold up price and resist downward movement while the resistance level is a price that tends to reject upward pressure.</p>
<h2><span>How to Determine Market Structure</h2>
<p><span>Determining market structure is a skill that all traders need to master in order to make informed decisions when trading. Here are 2 ways of identifying market structure.</p>
<h3><span>1 Spotting the Market Trend</h3>
<p><span>The first method is to identify the trend of the market, either up, down or sideways. For example, when price has been consistently making higher highs and higher lows, then it can be assumed that we are in a bullish market. Conversely, if prices have been on a consistent decline with lower highs and lower lows then it’s likely that we are in a bearish market. When prices move back and forth between support and resistance levels without any clear trend being established, then this indicates that we are most likely in a range-bound environment.</p>
<h3><span>2 Use of Indicators</h3>
<p><span>The second method involves the use of indicators such as Moving Averages and Relative Strength Index (RSI) to help you determine market structure. For example, an uptrend can be identified when prices have consistently stayed above a certain Moving Average line or when the RSI has been trading above 70 for several consecutive periods.</p>
<p>
<h2><span>How Prices Move</h2>
<p><span>So far we have discussed the different types of market structure and how to identify them. However, we still need to understand why prices move in certain ways. To do this, we need to look at how prices move.</p>
<p><span>We can break this down into</p>
<ol start="1">
<li><span>Impulse and corrections</li>
<li><span>Momentum and volume</li>
<li><span>Market waves</li>
</ol>
<h3><span>1 Impulses and Corrections</h3>
<p><span>Price movement is typically composed of two parts, impulses and corrections.</p>
<p><span>Impulses<span> are large and strong movements in price. They usually take place in the direction of the prevailing trend. If an impulsive price move foes against the trend, it is one of the best indications the trend could soon change.</p>
<p><span>Corrections<span> are smaller and weaker movements in price. They usually occur when prices pull back against a trend. If the price moves in the direction of the trend as if it is in a correction, it is a sign that it is weakening and could soon reverse.  </p>
<p><span>In a bullish market, impulses tend to be upwards and corrections are usually downwards. However in a bearish market, it is the opposite where impulses move downwards and corrections move upwards.</p>
<p><span>Impulsive moves tend to be in the direction of the trend and corrections against the trend, however it doesn’t always hold true. Some corrections can also be strong like an impulse and sometimes trends lose momentum with corrective type moves before regaining strength. Like any form of analysis, these ideas are not silver bullets but are simply a way to understand the current price action and help improve the probability of placing a successful trade in sync with the market.</p>
<h3><span>2 Market Waves</h3>
<p><span>The last concept we need to cover is market waves. Market waves occur when prices move from one extreme to another with zigzag patterns along the way.</p>
<p><img decoding="async" title="" src="https://www.keytomarkets.com/blog/images/image6.png" alt="" /><img decoding="async" loading="lazy" class="aligncenter size-full wp-image-24555" src="https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image6.png" alt="" width="690" height="474" srcset="https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image6.png 690w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image6-300×206.png 300w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image6-260×180.png 260w" sizes="(max-width: 690px) 100vw, 690px" /></p>
<p><span>https://corporatefinanceinstitute.com/resources/equities/impulse-wave-pattern/</p>
<p><span>Market waves are a manifestation of mass psychology as investors and traders enter the market with either fear or greed, causing prices to move in patterns that resemble waves. For example, when fear is high, prices tend to dip as traders sell their positions. On the other hand, when greed takes over and investors start buying into the market, prices typically rise. Essentially, these waves of trader sentiment flow back and forth, causing prices to move up and down in a zigzag like pattern and providing a basis for price prediction.</p>
<h3><span>3 Momentum and Volume</h3>
<p>M<span>omentum and volume are two other factors that can help you determine the direction of a trend. Momentum refers to the strength of a trend or price movement while volume tells you how many orders are being traded at any given time. High levels of both momentum and volume indicate that there is strong buying or selling pressure in the market. On the flip side, low levels of both would suggest that prices may be consolidating before making the next move.</p>
<h2><span>Market Structure with Support and Resistance</h2>
<p><span>The psychology behind support and resistance levels is rooted in the fact that investors will buy when price falls to a certain level (support) or sell when it reaches a certain point (resistance).</p>
<p><img decoding="async" title="" src="https://www.keytomarkets.com/blog/images/image3.png" alt="" /><img decoding="async" loading="lazy" class="aligncenter size-full wp-image-24546" src="https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image3-3.png" alt="" width="610" height="324" srcset="https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image3-3.png 610w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image3-3-300×159.png 300w" sizes="(max-width: 610px) 100vw, 610px" /></p>
<p>Source: Learnmarket</p>
<h3><span>1 Trends and Reversals</h3>
<p><span>Support and resistance can also be used to identify, understand and predict market structure. When prices move towards support levels, buyers tend to enter the market resulting in an uptrend. On the other hand, if prices are pushed back by resistance then this usually signals weakness in the trend and a potential reversal may be coming soon.</p>
<p><img decoding="async" title="" src="https://www.keytomarkets.com/blog/images/image7.png" alt="" /><img decoding="async" loading="lazy" class="aligncenter size-large wp-image-24558" src="https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image7-1024×478.png" alt="" width="680" height="317" srcset="https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image7-1024×478.png 1024w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image7-300×140.png 300w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image7-768×359.png 768w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image7-1536×717.png 1536w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/07/image7.png 1814w" sizes="(max-width: 680px) 100vw, 680px" /></p>
<p><span>https://www.tradingview.com/chart/YnhcFVxT/</p>
<p><span>Support and resistance levels can also be used to predict potential reversals in the trend. For example, if prices are hitting a resistance level multiple times but fails to break through on each occasion then this could indicate that there is strong selling pressure at this particular price level and a potential reversal could be coming soon.</p>
<h3><span>2 The Path of Least Resistance</h3>
<p><span>The path of least resistance is a term used to describe the direction which prices tend to move in due to market forces. This concept can be useful for traders as it allows them to identify potential trading opportunities and make more informed decisions when entering or exiting positions.</p>
<p><span>Momentum follows the path of least resistance. This means that while the trend is up, resistance levels will likely break and while the trend is down support levels will most likely break. When they don’t it is a signal that the trend could be set to reverse.</p>
<p><img decoding="async" title="" src="https://www.keytomarkets.com/blog/images/image8.png" alt="" /></p>
<p><span>In the example above, EUR/USD was in a downtrend(characterised by lower highs and lower lows) till price traded to a key support zone. This caused a price reversal as market structure changed from bearish to bullish. This shows how support and resistance levels, when combined with the path of least resistance, can be used to predict potential reversals or continuation in a trend.</p>
<p><span>By recognizing the different types of market structures you can better understand market conditions and use this knowledge to your advantage when making trading decisions.</p>
<p>The post <a rel="nofollow" href="https://www.keytomarkets.com/blog/education/learn-trade-forex/market-structure-in-trading-24539/">Market Structure in Trading</a> appeared first on <a rel="nofollow" href="https://www.keytomarkets.com/blog">Key To Markets Blog</a>.</p>