If you have ever been to a construction site. The builders and engineers work with a blueprint.
The blueprint gives the builders insight on what the construction will look like. The blueprint gives the project overseer a sense of direction on how the construction will be carried out.
The engineers, builders and manager they all understand the blueprint because it is their skill. They are masters in what they do.
Now, imagine giving that blueprint to a stock investor or a stock trader to oversee the project. Do you think the trader or investor will make sense out of the blueprint, if he has no substantial experience on how construction works
He wont be able to oversee the project because it is not his field and he doesn’t understand building concepts.
Now give that trader a chart of any financial instrument to analyze for you. He will definitely give you a proper analysis with a good prediction. Why? He can do that because he understands market structure.
Market structure enables a trader predict price movements.
What is market structure?
Market structure is the behaviour of price movement over a particular period of time.
A chart is a trader’s blueprint. The market forms different patterns. It could be a trending market, a consolidating market or a volatile market.
The market moves in the form of waves forming Highs and Lows. Example of a chart showing Highs and Lows.
From figure a above
The yellow region represents the HIGHS
The light blue region represents the LOWS
Reading the market structure
From the figure above, starting from the beginning.
Price breaks H1, makes a new low(L2) at the previous high(H1).
Price continues, breaks H2, makes a new low(L3) at former high(H2).
Price does not break H3
The price moves lower and breaks the low(L3). At the break lower, the uptrend has transitioned into a downtrend making lower lows and lower highs. The previous highs and lows serve as support and resistance.
Sometimes in an uptrend the lows don’t return to previous highs and in a downtrend, highs don’t return to previous lows. Check figure f, at the green resistance a new low was formed. Instead of returning to the previous high.
A market that moves upward is referred to as an uptrend forming higher highs(HH) and higher lows(HL). If you do not understand what that means. Here is a sketch below.
When price breaks above the previous High(H), the new high is referred to as a Higher High(HH). Alongside, when price breaks above the previous Low(L), a Higher Low(HL) is formed.
A down-trending market works the same way as an uptrend but moves in a reverse manner. In a downtrend the market makes lower lows(LL) and lower highs(LH). Here is a sketch of a downtrend below.
When price breaks below the previous low(L), the new Low is referred to as a Lower Low(LL). Alongside, when price breaks below the previous High(H), a Lower High(LH) is formed.
A Consolidation market
The market consolidates sometimes. In a consolidating market the market forms different patterns like rectangular patterns and triangular patterns.
Triangular patterns can be a symmetrical, ascending or descending triangle.
Symmetrical triangle forms Lower Highs and Higher Lows.
Below is a diagram of a symmetrical triangle.
Ascending triangle forms Equal Highs and Higher Lows. Below is an example of an ascending triangle.
Descending triangle forms Equal Lows and Lower Highs. Below is an example of an descending triangle.
Rectangular patterns form equal Highs and equal Lows. Below is an example of a rectangular pattern.
A volatile market
Trend traders don’t like a volatile market. Beginner traders get confused in a volatile market which results to bad analysis and trades.
In a volatile market, the market is neither in an uptrend or a downtrend. The market is directionless. There are quick market reversals in the market. The market making higher high and higher low, instead of continuing higher it breaks below making a lower low and reverses again.
The movement is a random movement. Most times, it is difficult to trade.
Below is an example of a volatile market.