September 12, 2023

Structure

Just as determining the direction of an asset requires an understanding of the structure, so determining the structure requires correctly finding the lows and highs.

What is a swing high/low? A swing high is a candlestick pattern that consists of three candlesticks: the center candle is the highest high, the adjacent candles have lower highs. The closing of the third candle should be below the opening level of the second candle.

Swing low is a candlestick pattern that consists of three candlesticks, the center candlestick is the lowest low, the adjacent candlesticks have lows above it

A swing low is a candlestick pattern that consists of three candles, the center candle is the lowest low and the adjacent candles have lows higher. The closing of the third candle should be above the opening level of the second candle

After determining the minimums and maximums, you can determine the direction of the trend - the structure. Understanding the structure gives the possibility to determine the direction of the traded instrument. The structure is the foundation for understanding the market and has many advantages in relation to the classical understanding of the trend.


We distinguish 3 main types of structure: upward, downward, consolidation

Upward structure

In this case, the traded instrument is in the growth phase, i.e. its price is growing. The price is moving upwards, from point A to point B. Unfortunately, this is not visible on the chart due to the presence of swing movements.

Schematic example

The upward trend is characterized by the formation of the HH+HL sequence (Higher High + Higher Low, the price updates the maximum without updating the minimum)

Graphic example

Unfortunately, price behavior does not always follow the example above. Quite often we can see such movements on the price chart

Realistic example

A realistic example of price chart behavior is given. In this case it is necessary to pay attention to the definitions of significant points of the structure, as well as to the rules given below

Within the macrostructure, a microstructure can be identified, which does not affect the main trend. The HH+HL sequence is highlighted in red, which indicates the ascending structure of the chart.

Within the macrostructure (marked in red), microstructure can be traced, which is secondary structure

The structure remains ascending until the significant points of the macrostructure (HL sequence, marked in red) are broken. At the same time, the microstructure minima (marked in blue) can be broken through.

Despite updates to the microstructure lows, the macrostructure lows, were not updated, which kept the uptrend intact

Top-down structure

In a downtrend, the asset loses its value, i.e. its price falls. On the price chart, such a movement, as we already know, will be represented in the form of swing movements.

That is, a downtrend is characterized by the updating of lows without updating highs (LH+LL sequence).

Note that in a downtrend, price updates the lows while the highs remain intact. Unfortunately, similar to an uptrend, a downtrend is not always represented by a clear LH+LL sequence.

Working with the structure

After determining the direction of movement of the asset, you should think about choosing a position. Trend is your friend. Which means the following - a position should be opened according to the trend.

An uptrend is long, a downtrend is short. Let's analyze the example of an uptrend structure.