Vocabulary
HH = higher high
HL = higher low
LL = lower low
LH = lower high
BOS = Break of Structure
MS = Market Structure
CHoCH = Change of Character (in the market)
Market structure (MS)
Market structure defines the structure in which the current market is
trading. It is what tells you whether the market is trending or not.
So how do we view it?
I don't advise just being a trend trader or a PA trader. Crypto is full of
widely available information and retail move info that anyone can
use to her an in-depth motion of the market. Hence in the long term,
I don't believe just studying PA, or Trading the trend or breakout is a
successful strategy. Confluence and data are where the sweet spot
lies. However, it is paramount that all your basics are clear and an
in-depth understanding of PA is a primary requirement.
Bullish MS
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| Bullish MS |
A bullish MS is identified when the
price makes a series of higher highs
HH and higher lows HL.
Every time the price takes out a high
to form a higher high, we get what is
called a break of structure BOS or
MSB (Market Structure Break).
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| Bullish MS in reality (4H BTC chart) |
Bearish MS
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Bearish MS |
A bearish MS is identified when the price makes a series of lower lows
LL and lower highs LH.
Every time the price takes out a low to form a lower low, we get a
break of structure BOS.
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| Bearish MS in reality (4H BTC chart) |
Why is MS so relevant in trading?
Remember the famous saying “The trend is your friend?”, well it is
only popular for a reason!
If you can use the market structure to identify the trend, more often
than not, the price will continue in the same direction. This might
seem contradictory at first to my usual “trade the range” motto but
it is essential to use Higher Time Frame MS to guide how you form a
bias while trading a Lower Time Frame range.
How to use MS
Market structure can help you define if-then scenarios. In this
section of the tutorial, we will describe how to put it to good use. I
like to use the ITTT model (If This, Then That).
Deep swings
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| Example of a deep swing High |
One of the questions about market structure is: which swing points should I use?
I suggest you look for deep swing highs and lows on higher
timeframes (never lower) to
answer that question.
We define a deep swing high as
the highest point that causes
the swing low and a deep swing
low as the lowest point that
causes a swing high.
Above is an example of the last deep swing high on a
1D BTC chart. The price was previously in a continuous uptrend,
making higher highs and higher lows, until it reached the high
marked with a green tick. The price failed to break
that high and ended up moving below the low that formed that
high. Thus, you have a BOS.
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| Example of a deep swing low |
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Pullbacks |
Pullbacks
Note that after every BOS we expect a pullback on that same
timeframe. And this is where market structure comes in handy.
If a BOS occurs then look for an opportunity to long/short on a
pullback. In other words, never think of buying right after a BOS; wait
for the pullback. Studying my SFP (Swing Failure Pattern) tutorial is
also advisable to better grasp why it is not wise not to trade
breakouts without context.
The formation of a lower low confirms a bearish trend change, our
entry would be on a pullback. We put our stop loss above the last
lower high and target previous swing lows.
Change of character CHoCH
The next concept is a tool that you can use alongside the break of
market structure (BOS) in order to anticipate when a run may be
finished and a pullback may be starting (Bearish CHoCH), and when a
pullback has finished and a run may be beginning (Bullish CHoCH).
The figure below will give you an idea of the whole setup, using BOS
and CHoCH combined with the market structure.
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| BOS+CHoCH in theory |
I recommend you look at CHoCH as the first sign of trend change; it
doesn’t have to be a deep swing structure; it can be in the minor
movements in between; while the BOS is a trend continuation where
we look for deep swing highs and lows to be taking out.
Note: CHoCH is not a guarantee, it can give false signals, use it in
confluence with other tools.
Trade Setups
Example1: Long setup
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| 1D BTC chart |
The above figure is an example of consecutive longs taken on a 1D BTC
chart. After we defined the first HH on a high timeframe, we wait
for a pullback to enter.
1. The first bearish CHoCH signals that the bullish swing run might be
over and a pullback is starting.
2. The second CHoCH breach is a bullish sign indicating that the
pullback might end and a swing run might start.
3 The same strategy is used for the rest of the trades.
Note: Market structure appears on all timeframes, but more often
than not we can get a bearish structure on lower timeframes while
the overall MS on higher timeframes is bullish. The key is to look for
signs of pullbacks (or CHoCH) on the lower timeframes to get with
general MS direction on the higher timeframe.
Example2: Short setup
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| BTC 1D chart |
The above figure is an example of a short trade taken on a 1D BTC
The first bearish CHoCH helps us identify when the bullish
upswing starts to weaken. Once the price breaks the previous
HL, the trend change is now confirmed.
1. Now we wait for a pullback and an LH to form.
2. Second bearish CHoCH is indicative of the end of the pullback;
more aggressive traders enter shorts after it.
3. For a beginner, wait for a double BOS (Break of HL and LL) to
confirm trend change and target previous swing levels.
Swing Structure & Substructure:
The goal behind this section is to add more clarity to the BOS and
CHoCH concepts.
Swing structure is the framework where we lay out our deep swing
highs and swing lows; it highlights the significant price fluctuations.
(Bigger picture)
The substructure is the minor movements happening inside the
larger swing structure. (Smaller picture)
BOS happens in swing structures while CHoCH happens in
Substructures. Also, these structures will be relative to the
timeframe that you are viewing.
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| 4H BTC chart |
Above figure is a 4H BTC chart; after the HH, we notice a BOS so we
mark out our deep swing high and low, every price movement
happening in between these two lines is categorized as noise or
minor movements, and we should refer to these substructures
changes as bearish CHoCH or bullish CHoCH.
Bearish CHoCH is the first switch turning the substructure from
bullish to bearish and bullish CHoCH is the first switch turning the
substructure from bearish to bullish. These are the only two
CHOCHs you should care about.
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| 4H BTC chart long setup |
The above figure is a long setup taken recently, BOS we waited for a
pullback to enter, the first sign of the start of a pullback was the
bearish CHoCH, and the second sign of the end of our pullback was was the
bullish CHoCH. We enter on the first green candle closing above
the bullish CHoCH and we target the previous HH. Notice that we
waited for a long setup since the swing structure (bigger picture)
is bullish. For confluence, you can use Volume Profile or simply
horizontal levels that are relevant to add more confluence to our
entry trigger.
Conclusion
1. A Higher Time Frame market structure can be used to form a
bias. Then trade the Lower Time Frame range to trade.
2 Understand what BOS is and when it occurs. Use Change of
Character for entries before Break of Structure takes place.
Explained in the various examples.
3. Market Structure should act as confluence in all your trades.
Use multiple tutorial concepts as a confluence for entries.
4. Market Structure understanding is the basic requirement for all
trading. If you don’t have a firm grasp of this concept, it will be
difficult to create your own trading system.
