Charts and indicatorsUpdated 2 min readBy the FXNOD team
Market structure in trading: highs, lows and breaks
Market structure is the pattern of swing highs and swing lows a price makes. Higher highs and higher lows are an uptrend. Lower highs and lower lows are a downtrend. Neither is a range. A break of structure happens when the price takes out the last swing point against the trend, which is the first objective sign that the trend may be changing.
The building blocks
| Term | Meaning |
|---|---|
| Swing high | A peak with lower highs either side |
| Swing low | A trough with higher lows either side |
| Higher high, higher low | Each peak and trough above the last: an uptrend |
| Lower high, lower low | Each peak and trough below the last: a downtrend |
| Break of structure | The price passes the last swing point in the trend's direction, continuing it |
| Change of character | The price breaks the last swing point against the trend |
Different teachers use these last two terms slightly differently. What matters is the event: which swing point was broken, and in which direction.
Reading it
Mark the obvious swing points
Only the ones you can see at a glance.
Label them
Higher or lower than the previous one of the same kind.
Name the state
Uptrend, downtrend or range.
Note the key level
In an uptrend, the most recent higher low. While it holds, the trend is intact.
What a break tells you
When an uptrend's last higher low is broken, the definition of the uptrend no longer holds. That does not mean a downtrend has begun. The market may range, or resume upward after a deeper pullback. A downtrend is confirmed only by a lower high followed by a lower low.
Structure depends on the timeframe
A break of structure on the five-minute chart can be an ordinary pullback on the hourly. Decide which timeframe's structure you are trading and judge breaks on that one.
Why it is useful
- It defines the trend without an indicator.
- It tells you where a trade idea is wrong, which is where the stop belongs.
- It separates a pullback from a possible reversal by an observable event.
Its limits
- Choosing which swings count is subjective.
- Breaks are often false, especially in ranges.
- On a random synthetic index, structure forms by chance and carries no information.
Questions people ask
- What is a break of structure?
- The price moving beyond a previous swing high or low. With the trend it signals continuation; against it, a possible change.
- What is the difference between BOS and CHoCH?
- Commonly, a break of structure continues the trend and a change of character is the first break against it. Usage varies between teachers.
- Which timeframe is best for market structure?
- Read it on a higher timeframe than your entry chart, so the swings you mark are significant ones.
Put it on a chart
Trade Pilot's chart has moving averages, RSI and Bollinger Bands, and a bot in Bot Forge can use indicators to choose its side. Try both on your Deriv demo account.
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