Market Structure
Last updated
Last updated
The concept of market structure is crucial in price action trading, offering insights into market behavior through key patterns and transitions.
Break of Structure (BOS): This happens when the price breaks a significant level in the direction opposite to the trend, suggesting a potential trend shift. For example, in an uptrend, if the price fails to make a new higher low and instead breaks below a previous HL, it’s a BOS, signaling that the trend may reverse or weaken.
Change of Character (CHoCH): This marks a shift in market direction, often seen when the market moves from a trending phase to a potential reversal phase. CHoCH occurs when price breaks a previous level but then quickly returns, showing indecision or a potential early sign of trend change. It’s more subtle than BOS and helps spot possible trend changes early.
Delta Volume Calculation: The latest enhancement to this feature adds a new layer of analysis through Delta Volume Calculation. When a BOS or CHOCH is detected, the toolkit calculates the delta volume within the range from the high or low point to the break point. This analysis considers all the candles in this range and determines whether the volume is predominantly bullish, bearish, or neutral.
Bullish Volume: If the delta volume is bullish, a green diamond is plotted at the high or low point, indicating potential upward momentum.
Bearish Volume: If the delta volume is bearish, a red diamond is plotted, suggesting downward pressure.
Neutral Volume: When the volume is neutral, a yellow diamond is displayed, indicating a balance in buying and selling forces.
This visual representation of volume dynamics provides an additional layer of insight, helping traders assess the strength and direction of price movements following a structure break. You can see an examples of this on the attached images, where the diamonds clearly indicate the type of volume driving the breakout.
This refers to the overall pattern or trend in the market, shown by price highs and lows over time. Key types include:
Uptrend: Higher highs (HH) and higher lows (HL).
Downtrend: Lower highs (LH) and lower lows (LL).
Consolidation: When price moves sideways without a clear trend.
Along with highs and lows it shows the price change from the previous points
Equal Highs (DT) and Equal Lows (DB) refer to price levels where multiple highs or lows occur at approximately the same level, forming a horizontal line on the chart. They are significant because they represent key areas of liquidity and often act as magnets for price action.
Double Tops (DT): When price creates two or more peaks at the same level, it indicates a strong resistance zone. Many traders place stop-loss orders above these highs, creating a pool of liquidity. Institutional traders or "smart money" may push the price above these highs to "grab liquidity" before reversing in the intended trend direction.
Double Bottom (DB): When price creates two or more lows at the same level, it forms a support zone. Traders often place stop-loss orders below these lows, creating liquidity. Smart money may drive the price below these lows to collect liquidity before a potential move upwards.
Market Mapping is a zigzag that provides an overview of market structure by marking key levels and trends based on the internal and swing settings. It visually maps out how the price moves within the defined structure, highlighting significant highs and lows to help traders see the market's flow and trend direction.
In the context of market structure trends, an indicator was developed to display the range of market swings, including equilibrium, high, and low points. Based on the direction of the market structure trend, the indicator highlights strong or weak highs and lows.
If the trend is upward, the low is considered strong, while the high is weak.
Conversely, if the trend is downward, the high is strong, and the low is weak.
This helps traders see if the price is likely to return to its equilibrium level, offering insight into potential reversal or continuation points within the trend.
The Market Structure settings allow traders to customize how price structure and trends are analyzed and displayed on the chart. Here’s a breakdown of each setting:
Internal: Enables internal structure analysis within the larger market moves. The number input determines the sensitivity to smaller price movements (internal swings). You can also choose the colors to distinguish internal structures from larger swings.
Swing: Identifies the major swings or larger structural points in the market, providing a broader view of trend direction. The number input controls the sensitivity to these swings, with higher values filtering out minor moves. Like internal structure, you can select a customize colors to differentiate it visually.
Swing Data: Activates additional data or labels on swing points, such as displaying the high/low values for better reference on each swing with the price change (PC) from the previous point.
Equal Highs/Lows: Detects equal highs and lows, which are levels where price has created multiple highs or lows at the same level, often signaling potential liquidity zones. The number setting (0.3 in this case) defines the sensitivity or tolerance for how close the highs/lows need to be to consider them "equal."
Market Mapping is a zigzag feature that provides an overview of market structure by marking key levels and trends based on the internal and swing settings. It visually maps out how the price moves within the defined structure, highlighting significant highs and lows to help traders see the market's flow and trend direction.
Strong/Weak H&L: Identifies strong and weak highs and lows within the trend. This setting helps determine if a high or low is likely to hold or break, aiding in spotting potential trend reversals or continuations. The number setting adjusts sensitivity, with color options for customizing the display.
Structure Candles: Highlights candles that contribute to the formation of market structure, making it easier to see where trends shift and significant highs or lows form. Colors can be customized for easy identification.
These settings provide a comprehensive view of market structure, helping traders identify trends, key levels, potential reversal zones, and liquidity points. Customizable colors and sensitivity options make it easy to adapt the tool to different timeframes and trading styles.
