An effective method for determining market structure

Understanding market structure is a key aspect of technical analysis, allowing traders to effectively interpret price movements and the real dynamics of the market. This approach helps to distinguish between corrections and major trends, which is critically important for an objective assessment of market trends.

Main Market Conditions

The market structure can be in one of three states:

• Upward trend (bull market)
• Downtrend (bear market)
• Side trend (range)

Characteristics of Trends

Upward trend

In an upward trend, successively higher highs and lows are formed. Key points:

• Each new minimum must be higher than the previous one.
• A new minimum follows the breakout of the previous maximum.
• A sufficient price impulse is required to create a new maximum.

The most effective strategy is to wait for the formation of structural minimums and maximums to enter a position.

Downward trend

The descending trend is characterized by lower lows and lower highs. Features:

• Retracements are often shallow.
• Breakthroughs of minimums occur rapidly
• It is important to consider the differences from the ideal model

Side trend

Horizontal ranges provide numerous trading opportunities. Popular strategies are built upon them, such as:

• 3tips
• Fakeout
• Sweep
• The3
• FRVP

Special Market Situations

False Breakouts

The price may briefly move outside of the trend or range and then return. This can be misleading, so it is important:

• Analyze price behavior near key levels
• Consider experience to assess the reliability of breakouts

Chaotic movements

There are two types of chaotic states:

• With low volatility - require wider ranges for analysis
• With high volatility - often caused by extreme events and can lead to significant losses

Basic Market Structure: 123 Model

This model underlies most market movements:

1. The impulse that creates the driving force
2. Pullback after impulse
3. Continuation of movement in the direction of the impulse

This structure reflects the balance of supply and demand, as well as the psychology of market participants.

Application of Structural Analysis

Understanding market structure allows:

• Choose optimal entry points
• Avoid chasing the price
• Reduce risks and psychological pressure when holding positions

The structural approach is particularly effective in trending markets, but it may be less applicable during periods of high volatility or on nonlinear charts.

Mastering structural analysis significantly improves the quality of trading decisions and helps develop a more disciplined approach to the market.