When it comes to day trading, everyone looks for the “Holy Grail”, the green light red light indicator. A sign to tell them how to get profitable 100% of the time, a shortcut if you will. A lot of time is spent by aspiring traders looking for something that isn’t there. The unicorn of trading. All while ignoring the basics of day trading in any market. The market structure, being able to read market structure. Or what many call price actions. Become a master in simplicity when learning how to trade and the riches will follow. Market structure is the most important tool you will ever get and being able to read it will open your eyes to a new world of financial markets.
What is Market Structure?
Market structure by definition is the simplest form of price movement in the market and is being to read it. It is basic support and resistance levels on the charts, swing highs, and swing lows. These are levels, which are easily identified and hold until they don’t. Market structure is a trend following tool that traders read and follow based on how an asset moves. From bullish moves, to bearish and in between with ranges.
Market Structure is often referred to as Price Action. We refer to this study as market structure because it’s how the whole market moves. Understand the trend and the anticipated moves and then you can add other criteria to your trade qualifiers. Like volume, pivot points, moving averages, and more. Which we will talk about slightly at the end of this discussion.
Types of Market Structure
Market structure is simple and a basic form of understanding, how markets move. It’s made easier with just 3 different types of market structure. While Price Action is how the market moves based just on price. Without the consideration of trends and how they may continue.
The market trend in 3 different directions at any given time and understanding when a shift occurs based on the timeframe YOU watch is pivotal to successful trading. The 3 types of market structure are:
- Bull trend
- Bear trend
- Sideways trend
Markets trend in one the three directions above and understanding how to read the continuation of the trend of the failure of the trend all comes from being able to read market structure. The majority of the time, the market trends in a sideways motion. Or a range, then you have quick bursts in either direction.
The bull trend is depicted by higher highs and higher lows. The trend will continue in that direction until a lower low is printed by the asset price. The trend begins to show signs of weakness when it fails to print and higher high.
The bear trend is the price action of lower lows and lower highs. The bear trend will continue to fall as long as lower highs continue to print, once a higher high comes into the price, the trend will end. The sign that the trend may be reversing is price beginning to print higher lows or equal lows.
The sideways trend is a trend that has equal highs and equal lows. Price trends in a range during this point of the market and is in consolidation. Markets can move in a period of consolidation for a long time. This trend is broken if the price breaks out from the top or bottom of the range. This could be the beginning of one of the first two trends.
A disclaimer, market structure, and price trends can be different depending on the timeframe chosen to trade. If you are a day trader you may see a certain trend on a daily chart, then on an intraday chart it may be completely opposite. For example being, on a daily chart, you may see Tesla going up (February 2020), a clear bull trend. However, zooming in on the intraday charts, a 5-minute you may see a bearish trend. This is the difference between the macrostructure and the microstructure of an asset.
Bullish Trend
No matter which way you look at a chart you will find a trend of some sort. Regardless of what the timeframe is you can find a trend. The key for the bullish trend to hold out is for consistent higher highs and higher lows. There are two key criteria here and understanding how they move will allow you to understand when that trend is over!
The higher low aspect is the first part. When price pulls back from a push higher will it create a higher low? The worst-case scenario is that we form an equal low that is still considered the bull trend holding. There is a caveat in this circumstance. Will the price make a new high off that base? Should the trend make a new high, the trend will continue. Should the move fail to make a new high then you have to be cautious on the next test of support.
That means it’s pivotal for the trend to at least make an equal or higher low to have a chance of continuing.
Below is an image of ETSY stock which is graphed on a daily chart. You can see how price makes higher highs and higher lows, until the green box where we have an equal low. In this case we need to break the 250 tops to see a continuation of the upside.
Traders can take any timeframe to analyze the market structure and how it will continue.
Take a look at the daily chart of SPY below, the higher highs and higher lows are extremely evident.
While on the 5-minute chart, you can see there is a completely different market structure pattern. Meaning it really depends on what timeframe you trade, that is the structure you need to follow. The macrostructure is very important because it identifies key levels of support and resistance in the market. Which could be translated to the microstructure and refined.
In a bullish trend, the breakdown of the trend will happen when the asset stops printing higher highs and in turn breaks a low. This was the case with ETSY (below) The green box was the line in the sand for the longs to continue the move higher and the buyers to continue the uptrend.
That all-important area failed twice. The first test after making a move to 250 was supposed to result in yet another higher high through 250. However, the price stalled at 230. The second test of that area was held too, in this case, there were lower expectations of that being held for a second time. That second push didn’t even make a move to 230 instead fell short and based on that the downside under 190 was expected. There are other tools you can use in market structure trading that we will talk about later in this post. Such as support and resistance levels and moving averages.
- Bearish Trend
- Range Trend
Take a look at the daily chart of Tesla below, the higher highs and higher lows are extremely evident.
While on the 5-minute chart, you can see there is a completely different market structure pattern. Meaning it really depends on what timeframe you trade, that is the structure you need to follow. The macrostructure is very important because it identifies key levels of support and resistance in the market. Which could be translated to the microstructure and refined.
Market Structure Charts and examples
As mentioned above, when using market structure to identify the movement of price on a chart, it depends on the time frame used.
Using multi-timeframe analysis to identify the trade opportunities and the flow of the market is widely used and very effective. Going from a larger time frame to identify the major peaks and valleys of an asset will give you areas of key support and resistance. From there dropping down to the time frame you are actually going to trade on will make it a lot easier. On the time frame, you trade on you will find another market structure. The microstructure of the current assets move.
Let’s use an example, of a 4-hour (macro-structure view) and a 10-minute (micro-structure view). We’ll be looking at the S&P 500 futures market. That’s because the asset trades throughout the night and there are no gaps in price.
Below is the 4-hour S&P 500 chart. The trend is clearly to the upside and we’ve identified some strong levels for both support and resistance. Depending on where the price is (above or below the levels). The idea is to identify these levels to play off on the 10-minute. Watching for impulse moves that create new highs for the bull trend pull back.
Below is a chart of the 10-minute on the S&P 500 which is a micro-structure view of the above. You can see the 4-hour levels holding well and confirming the upside structure. From here we identify the level for the long continuation based on the bull trend. Remember higher highs and higher lows. Where does price pullback to? The previous broken top or the impulse that brought the price to a new high.
Support and Resistance levels
As important as market structure and trend structure is, so is support and resistance drawing. If you know where to draw your support and demand zones you will have an easier time finding entries and exits. Support and resistance levels can be drawn on multiple different timeframes dependent on what it is you’re trading.
For example, if you’re swing trading then looking at a larger time frame to start is recommended. Start with a weekly chart, draw your key levels. Explore the daily then the hourly or 4-hour to refine those levels.
If your day trading starts with the hourly chart, draw your support and resistance levels. Then move onto the 10-min and the 5-min to refine the levels and draw more key levels you may have missed.
The key to drawing support resistance is twofold:
- Find extreme areas of rejection
- Multiple tests of the same levels.
Here is an example of Microsoft with 4 key areas of support. This is on a daily chart for swing traders. A few may have been missed but overall these are the most important.
Here is a great video we did at TRADEPRO Academy to help you identify trading levels:
Moving Averages
You can add multiple different tools to your trading arsenal, indicators to help you with levels (pivot points) and indicators to help you with the overall trend just like moving averages.
Moving averages are a good tool for traders but it does depend on the timeframe used and if you’re going to swing trade or day trade!
Swing Traders:
- Daily Chart, 20 Exponential moving average 34/50 Exponential moving average cloud
- Hourly chart, 34/50 Exponential moving average cloud
Day Traders:
- 10-min chart, 34/50 Exponential moving average cloud, 5/12 Exponential moving average cloud
- 5-min chart, 20 Exponential moving average
For more info on how to use these averages check out the following video:
Keep in mind that these indicators and tools should be with market structure rather than on their own.
Market Structure in different markets
Traders can use market structure to trade any market! In fact, it is highly encouraged that they do so when day trading. Market structure is the basis of all technical analysis trading. Understand how to trade market structure and you can trade any market. Market structure is vastly used in Forex trading.
Market structure in Forex trading or price action is how many people take advantage of the markets. No indicators, and no volume. Because the market does not have a centralized exchange. Forex traders often swing trade the market based on the structure to take advantage of the opportunity. Day trading on Forex is possible and not rare and again, done with market structure.
When it comes to other markets, like the futures market, there are a lot of different tools to use. Not indicators! Rather order flow tools to read the overall institutional sentiment. A proven tool that all prop traders use. However, the basis of day trading or even swing trading the futures market is again market structure. Understanding how one asset moves based on price will open your eyes to a whole new world. You cannot unsee it after that and you will be able to read any assets chart.
Just like you will when trading or investing in stocks! It’s not all about fundamental analysis when investing in stocks. Using technical analysis for entry ideas is amazing. It strengthens your analysis when combining the two together. Moral of the story, learn market structure to trade markets more efficiently. Any market, any assets at any time.
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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.
