Reading the market structure will be the difference between losing trades and profitable ones. Many traders often fail to pinpoint high and low points in the market, thus making wrong decisions that lead to loss. Here, if you need a step-by-step guide for understanding the structure of the market, then look no further as you are now on the right website.
This is the video, where I breakdown the five-step blueprint to mastery of market structure, which earned me over $35,000 in 30 days. And I will teach you my process for finding market structure key points and how I use this to create a great trading strategy.
By the end of this article, you’ll have a solid understanding of market structure, including how to spot trends, avoid common mistakes, and develop a trading plan that maximizes your chances for success.
Step 1: Identifying True Market Structure
To start accurately reading market structure, the first step is to identify the external swing points—key highs and lows. These points help us determine whether the price is trending upward or downward. For instance, if we note a high and a low, then the next high and low are lower than the previous points, it means that we have a bearish market structure. On the other hand, the more the lows go up, and the highs increase, the more the market appears to be bullish.
Conclusion
Determination of direction: use of external points (highs and lows)
Bearish Market: Lower highs and lower lows
Bullish Market: Higher highs and higher lows
Step 2: Change of Character
Change of character is when the market structure changes from one direction to another. A change from bearish to bullish occurs when a high point, known as a swing high, is broken, which may indicate a reversal. A change of character is a change in trend, and one needs to observe these changes to predict the next direction of the market.
Key Takeaways:
- Change of character occurs when there is a significant break of a high or low.
- Be prepared for trend reversals and prepare yourself to adjust strategy accordingly.
Step 3: Trapping Identification – Internal vs. External Structure
A common mistake that traders make is confusing internal market structure with external structure. Internal structure refers to the price movement within a defined range (i.e., between two external points) before a breakout occurs. Often, traders mistakenly interpret a pullback as a new trend and enter trades prematurely. Only the external highs and lows should be considered true points of market structure.
Important Takeaways
- Internal structure is the range between external highs and lows.
- Don’t trade opposite the trend within the internal structure.
- Always look for external highs and lows to confirm.
Step 4: The Real Problem-Solving (Trade Entries)
Perhaps one of the hardest decisions made by traders relates to entry once structure has broken. Most get sucked into trades on a breakout, when it subsequently pulls back. Rather than entering too soon, take your time for a pull back, ideally to an initial discount retest. Employing Fibonacci tools like retracement lines may be handy for such point selections, resulting in better chances at higher-risk to reward-ratios.
Take Aways
- Don’t enter a trade right away after a breakout.
- Wait for a pullback or retest of the breakout point before entering a trade.
- Use Fibonacci retracements to find the optimal entry points at discount levels.
Step 5: Refine Your Strategy Using Confluence
The final step to mastering market structure is confluence. This involves combining multiple tools to confirm the entry point. For example, you can pair a market structure analysis with the Fibonacci tool to help you spot good entry levels in the discount zone. Confluence also involves the use of order blocks and fair value gaps, areas where institutional traders have entered the market, which increases the probability of a good trade.
Key Takeaways:
- Apply confluence by integrating market structure with the tools such as Fibonacci.
- Identify order blocks and fair value gaps to trade more reliably.
- Look for confluence in the discount zone to maximize your risk-to-reward ratio.
Conclusion
Mastering market structure is essential for becoming a profitable trader. By following this five-step blueprint, you’ll be able to identify key market trends, avoid common pitfalls, and refine your trading strategy. Remember, successful trading isn’t about chasing every move—it’s about understanding the market’s structure, waiting for the right opportunities, and entering trades with a clear plan.
As a bonus, check out the next video in the description to learn how you can start transitioning from a beginner to a profitable trader.
