STRUCTURE

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Structure

Market structure is one of, if not the most important aspect of the forex market. No
other indicator will give you the information that market structure does. All the
answers to where the market is willing to go will be found once structure is
recognised and applied correctly. This topic will need to be understood and
studied thoroughly so take your time.

Simply put, market structure consists of the highs and lows that are created
in a trending environment. The formation of these highs and lows inform us of the
bias and what kind of market we are in. For example, if we have repeating higher
highs and higher lows, the market is showing a clear willingness to provide us with
higher prices and move bullish. If we are presented with lower highs and lower
lows, the market is showing us a clear willingness to move bearish and provide us
with lower prices. Understanding this on a higher time frame will allow you to
determine the overall long term trend of the market.

As shown on the left, we have a

clear formation of higher highs
and higher lows. This establishes
the overall trend as bullish,
therefore, the highest probability
setups would be long positions
from the discount end of the most
relevant price range.
Accumulating long positions from
these discount prices would allow
you to hold these positions to the
previous major structural point.
For example, in this case, that
would mean getting in long at a higher low, and holding the trade to the previous
high.

This brings us on to the idea of having expectations from the market. Using
basic knowledge of structure, we can expect that once a higher high is made, a
retracement is due in order to make a higher low, which would then go on to make
another higher high. The opposite is true for bearish market conditions.

Understanding this allows us to be smart with our pro t taking. For example,
if we are in a long position at a higher low, we can expect a higher high, therefore,
taking pro ts at the previous high would be a generous, yet sensible target.
However, if we are trading short from a higher high, we aren’t expecting the
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previous low to be purged, and therefore we have to take pro ts in sensible areas
above the previous low. Countertrend trading always has its risks but using the
correct system allows this risk to be minimised.
Just because we are overall bullish, however, doesn’t mean that we should only
trade long positions from higher time frame higher lows. This is because between
every higher high and higher low is bearish price action which can be traded using
the same logic.

As is shown above, this H4 bullish cycle lasted just over 23.5 days. For 10.5 of
those days, however, price was bearish and can be traded.

As you can see above, even in a bullish market, there are periods of time where
price will be bearish by de nition. The rst bearish leg is clearly a retracement, and
on lower time frames would consist of lower highs and lower lows. This would
characterise the bearish structure, but to the uninformed would also mean that
price is now overall bearish. However, this is not the case. Even though the

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retracement displays bearish market structure, we are still inside the parent, bullish
price leg. Therefore, until we break the previous higher low, we are still bullish
overall.

This can be better appreciated using the screenshot above. The green structural
points demonstrate the overall bullishness of the market, whereas the inner red
structural points demonstrate the bearish retracement which is within the overall
bullish structure.

Understanding that we are only bearish for a retracement within the parent
bullish leg allows us to expect that once we are in the discount end of the parent
price range, the higher time frame higher low can be formed and the inner bearish
structure can shift and follow the overall bullish trend.

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The example above shows that once we reach speci c levels which will be
explained in the rest of the strategy, we can expect a shift in structure on the lower
time frames from bearish retracement to bullish continuation.

Understanding whether you are trading a continuation or retracement will

allow you to maximise pro ts whilst minimising risk and avoid getting caught on
the wrong side of the market.
When studying structure, it is also imperative to use your knowledge of price
ranges in conjunction with external and internal structure. As mentioned,
retracements will display countertrend structure, and if you are unaware of where
you are in the market, it is easy to get caught out.

On the left, we can see that there is a clear formation of higher highs and higher
lows. In this environment, traders will naturally look for longs and they wouldn’t be
completely wrong. However we see on the right that price crumbled where traders
would’ve expected a higher low.

This is because they failed to

realise that the formation of
discrete higher highs and
higher lows was all a part of
internal structure inside the
parent price range. For
bullishness to be established,
the highest high had to be
broken. Therefore, even
though higher highs were

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being formed, they weren’t the higher highs we need to establish bullishness.
Therefore, since the market failed to make a higher high and ended up making a
lower low, we can shift our expectations of the market. Furthermore, notice how
the recent lower low was made from the premium end of the parent price range.

Now, since a higher high failed and a lower low was made instead, using the rest
of the strategy, we can expect a lower high at speci c areas which would lead to
another lower low.

Above is an example of the way the market can be read using proper knowledge of
market structure.

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