If you are still confused on this point, market structure is something that will help you. This guide will explain market structure’s most critical characteristics about how to determine market changes, use the premium and discount model, and learn the three types of market structures that you may never know. This will be combined in order to help position you for a profitable trade.
The Basics of Market Structure
Mastering the price action is essential to understanding market structure. First, let’s define the typical market structure you’ll encounter:
Bearish Structure
We see a series of lower highs and lower lows, which indicates that sellers are in control.
Bullish Structure
The trend shifts as higher highs and higher lows form, which signal a bullish market.
In our example, we are in a bearish trend, where prices make lower highs and lower lows. At some point, we experience a change of character (CHoCH), where the market transitions from bearish to bullish. This is the first key insight that gives us an edge: spotting the shift before it fully develops.
Understanding the Change of Character
A Change of Character (CHoCH) occurs when the market changes direction, meaning it has switched from going one way to another. In a bearish trend, when the market is making higher highs and higher lows, that’s the signal that it may be going into a bullish phase.
If we catch this turn early, we know where price likely is going next, and this gives us an enormous edge. But we are not assuming that price will keep going higher. We need confirmation of this.
Market Structure Concepts: Advanced
Now, let’s get into a more advanced yet realistic view of market structure. This is a swing point view: major highs and lows that shape the direction of the market.
First off, we shall identify swing structure by means of external swing points. This means,
If there is a price low followed by a pull back, then more often than not this pullback occurs within the previous price action.
We understand a trading range to be between the highest high and the lowest low prior to price moving a new direction. In this context, a lower low after the occurrence of the lower high bears out the definition.
Importance of the Premium and Discount Model
The premium and discount model is a simple yet powerful concept that helps identify when price is trading at favorable levels. Here’s how to use it:
When Price is Bearish
If the market is declining, drop a Fibonacci retracement from the high to the low. The premium zone is between 0.5 and 1 on the Fib, while the discount zone is between 0 and 0.5. Traders look for the price to be back in the premium area (where prices are seen as overbought) before looking for short trade opportunities.
When Price is Bullish
In a bullish trend, we do the opposite. We’ll look for price to retrace into the discount zone (below 0.5) before moving higher.
With this strategy, you can determine which entry points may be probable due to market conditions.
Key Entry Points Identification
Now that we know the market structure, we can apply it in finding high-probability entry points. Here’s how you do it:
Watch Changes in Market Structure
Identify when the market breaks structure (CHoCH) from bearish to bullish or vice versa.
Use the Premium/Discount Model
This will guide you where to enter the market, because price moves inside key levels.
Use Confluence Zones
When market structure and Fibonacci levels align together, that is a high-conviction area to enter trades in.
Conclusion
By mastering the basics of market structure and combining it with advanced tools like the premium and discount model, you’ll gain a competitive edge in the market. Understanding when and where to enter positions based on the market’s trend and structure can significantly improve your trading strategy.
Having understood deep inside how market structures apply to real situations, you can reap handsome gains that even might amount to $100,000 or so with good decisions made strictly along rules for trading.
