Market structure is the framework that defines how price moves. Understanding market structure allows you to identify the trend, anticipate reversals, and find high-probability trade setups. In this comprehensive guide, we will explore everything you need to know about market structure trading.
What is Market Structure?
Market structure refers to the pattern of swing highs and swing lows that price creates over time. By analyzing this pattern, traders can determine whether the market is trending up, trending down, or moving sideways in a range.
Core principle: Markets move in waves. By studying these waves and their relationship to each other, you can understand who is in control, buyers or sellers, and where the market is likely to go next.
The Three Market States
1. Bullish Structure
Bullish market structure occurs when price makes higher highs and higher lows. Each rally exceeds the previous peak, and each pullback holds above the previous low. This pattern shows buyers are in control.
2. Bearish Structure
Bearish market structure occurs when price makes lower highs and lower lows. Each rally fails to reach the previous peak, and each decline exceeds the previous low. This pattern shows sellers are in control.
3. Ranging Structure
Ranging structure occurs when price oscillates between a defined support and resistance zone. Neither buyers nor sellers can establish control. Price bounces between the boundaries until one side breaks out.
Break of Structure (BOS)
A break of structure occurs when price breaks beyond a previous swing point in the direction of the trend. This confirms trend continuation and is often used as an entry signal.
Bullish BOS Example
In an uptrend:
- Price makes a swing high at $110
- Price pulls back to form a swing low at $105
- Price rallies and breaks above $110
- This break above the previous high is a bullish BOS
- It confirms buyers remain in control
Bearish BOS Example
In a downtrend:
- Price makes a swing low at $90
- Price rallies to form a swing high at $95
- Price drops and breaks below $90
- This break below the previous low is a bearish BOS
- It confirms sellers remain in control
Change of Character (CHoCH)
A change of character signals a potential trend reversal. It occurs when price breaks a key swing point against the prevailing trend direction.
Bullish CHoCH
In a downtrend making lower highs and lower lows, a bullish CHoCH occurs when price breaks above a previous lower high. This signals that buyers may be taking control.
Bearish CHoCH
In an uptrend making higher highs and higher lows, a bearish CHoCH occurs when price breaks below a previous higher low. This signals that sellers may be taking control.
Important distinction: BOS confirms the existing trend. CHoCH signals a potential change in trend. Recognizing the difference is crucial for proper trade direction.
Internal vs. External Structure
Markets have structure within structure. Understanding this concept helps you see the bigger picture while trading smaller moves.
External Structure
External structure refers to the major swing points on your chart. These are the obvious peaks and troughs that define the overall trend direction.
Internal Structure
Internal structure refers to the smaller swing points that form between external swings. These are the minor pullbacks and rallies within the larger move.
Structure Within Structure
On a daily chart in an uptrend:
- External structure shows HH and HL on the daily timeframe
- Zooming into the 4-hour chart reveals internal swings
- The pullback from daily HH to daily HL contains smaller swings
- These internal swings can be traded or used for timing entries
Trading Market Structure
Strategy 1: Trade the Pullback
After a BOS confirms trend continuation, wait for a pullback to a key level. Enter when structure turns back in the trend direction on a lower timeframe.
Strategy 2: Trade the CHoCH
After a CHoCH signals potential reversal, wait for confirmation. Look for a follow-up BOS in the new direction before entering.
Strategy 3: Range to Trend
When price is ranging, wait for a clear break of the range boundary. This break often leads to a trending move. Trade in the direction of the breakout.
Key Levels in Market Structure
Certain price levels within market structure deserve special attention:
- Swing highs and lows: These define the structure itself
- Origin of the move: Where the impulse move started
- 50% retracement: Midpoint of the previous swing
- Previous BOS levels: Often retested as support or resistance
- Order blocks: Candles at the origin of moves
Multi-Timeframe Structure Analysis
Professional traders analyze structure across multiple timeframes to get a complete picture.
- Higher timeframe: Determines overall bias (daily or 4-hour)
- Trading timeframe: Where you look for setups (1-hour)
- Entry timeframe: Fine-tune your entry (15-minute)
The key is alignment. Look for trades where all timeframes agree on direction.
Common Mistakes to Avoid
- Trading against structure: Always know the higher timeframe direction
- Calling reversals early: Wait for CHoCH confirmation
- Missing the bigger picture: Check multiple timeframes
- Overcomplicating: Structure is simple - HH, HL, LH, LL
- Ignoring context: Where structure breaks matters
Analyze Your Structure Trading
Pro Trader Dashboard helps you track your performance on different market structure setups. See which strategies work best and refine your approach over time.
Summary
Market structure is the foundation of price action trading. By understanding how to identify bullish, bearish, and ranging structures, recognize BOS and CHoCH, and analyze multiple timeframes, you can make more informed trading decisions. Start by marking structure on your charts and observing how price respects these levels.
Take your understanding further with our guide on order blocks trading or learn about fair value gaps.