Market Structure
Terminology
• Trend: A movement that occurs between accumulation/distribution phases.
• Upward Trend: Movement upwards from the accumulation phase to the distribution phase.
• Downward Trend: Movement downwards from the distribution phase to the accumulation phase.
• Accumulation: A narrow price range where a major player accumulates a position to sell the asset at higher prices, leading to an upward trend.
• Distribution: A narrow price range where a major player distributes a position to make a profit, leading to a downward trend.
• Market Cycle: A sequence of market phases where a major player accumulates/distributes a position, initiating upward/downward movements.
• Impulse Movement: Movement directed along the main trend.
• Corrective Movement: Movement directed against the main trend.
• Market Structure (MS): Market structure. HH (Higher High) - higher maximum. HL (Higher Low) - higher minimum. LH (Lower High) - lower maximum. LL (Lower Low) - lower minimum.
• Bos (Break of Structure): A break in structure.
• Conf (Confirmation): Continuation (update) of structure.
Market Cycle
The market is always in either a trending movement or in accumulation/distribution. For the price to move up, a major player must accumulate a position, holding the price within a narrow range. Once the position is accumulated, an upward trending movement begins. To make a profit, the accumulated asset must be sold, and like during accumulation, the major player compresses the price into a narrow range where the asset is sold. Once the position is distributed, a downward trending movement begins.
To summarize: accumulation phase -> upward trending movement -> distribution phase -> downward trending movement. This entire sequence is called the market cycle.
Trend Definition
• Upward Trend: Price highs and lows are higher than the previous ones.
• Downward Trend: Price lows and highs are lower than the previous ones.
The nature of the market is that any movement along the trend is accompanied by a correction. The market balances itself. Just like in any process, after a sharp jump, a rollback always follows. The bigger the jump, the bigger the rollback. To understand the market situation, it is necessary to know what impulse and corrective movements are.
• Impulse Movement: Movement directed along the trend.
• Corrective Movement: Any movement against the trend.
Globally, the market may be in an upward trend (impulse) while locally in a downward trend (correction).
Trend = Impulse Movement + Corrective Movement.
The market is fractal, which means that each timeframe has its own trend. The global market situation is shown by higher timeframes (weekly, daily), while the local situation is reflected in smaller timeframes (1-4H).
HH HL / LH LL
Market structure is a key concept in Smart Money and one of the most important tools we will work with. When combining the trend and structural points (swing), we get the market structure.
• Upward Structure: Movement where key highs (HH) and lows (HL) are higher than the previous ones.
• Downward Structure: Movement where key highs (LH) and lows (LL) are lower than the previous ones.
As long as the price maintains the original structure, the trend continues.
Break and Update of Structure (bos/confirmation)
Once the original structure breaks, the trend changes to the opposite direction. This change is preceded by BOS (Break of Structure) – a specific minimum in an upward movement or a maximum in a downward movement, which is key in this trend. A signal of a structure break would be a breakout of this maximum/minimum and the closure of the candle body above it.
Schematic Representation of the BOS (Break of Structure) in an Upward Structure.
After the level of this minimum is broken, we can note that the upward market structure is no longer relevant.
Schematic Representation of the BOS (Break of Structure) in a Downward Structure.
After the level of this maximum is broken, we can note that the downward market structure is no longer relevant.
Graphical Representation of the BOS (Break of Structure) in an Upward Structure.
Graphical Representation of the BOS (Break of Structure) in an Downward Structure.
• Conf (Confirmation): Confirmation (update) of the market structure break. Updating the key minimum/maximum of the new structure.
A conservative approach is to look for an entry point after confirmation. Structural confirmation provides an understanding that the market has fully changed direction and is moving in the opposite direction.
Schematic Representation of the СONF in a Upward Structure.
Graphical Representation of the СONF in an Upward Structure.
Schematic Representation of the СONF in a Upward Structure.
Graphical Representation of the СONF in an Downward Structure.
Conclusion
Market structure serves as the cornerstone of understanding price movements and trend dynamics. By recognizing the phases of accumulation and distribution, traders can anticipate market shifts and better position themselves within the broader market cycle. Concepts such as Break of Structure (BOS) and Confirmation (CONF) provide critical signals for trend reversals and market entries, allowing for strategic decision-making.
Without a firm grasp of market structure, analysis becomes directionless. By focusing on the relationship between timeframes and the interplay between impulse and corrective movements, traders can navigate both the global and local perspectives of the market. Ultimately, mastering these principles is essential for identifying optimal trade opportunities and aligning with the long-term market direction.