Forex Market Structure
In this section, you will learn how the market is structure, how to define trends, the benefit of knowing the forex market structure, and where the market is heading.
Learning about the forex market structure is very important because these will help you get a better understanding of how chart patterns are formed and how price action can dictate market movements.
Forex Market Structure – How To Read It
Let’s start off with the terminology:
Higher High – This is when the market has created a new higher, that has traded higher than the previous higher high.
In the example above we have highlighted the higher highs, these are very easy to identify. Simply look at the most recent high and look left. If the most recent high is higher than the previous, the most recent high becomes the higher high.
Higher Lows – This is when the market creates a low that is higher than the previous low. These are super easy to identify.
Lower Lows – This is when the market falls to a low that is lower than the previous low.
Lower Highs – This is when the market falls to a low and trades back higher but never forms a new high that is higher than the previous high.
That is the forex trading basics structure. Easy enough?
We use market structure to define trends.
An upward trend consists of higher highs and higher lows as demonstrated below:
The image demonstrates an upward trend’s market structure of higher highs and higher lows. These are important to identify as these alone are early indicators if the structure has broken, then a change in trend may about to occur.
A downward trend consists of lower highs and lower lows.
Same concept as the upward trend market structure. Easy to identify. It is good practice to mark lower highs, lower lows, higher highs, and higher lows on your charts at the very beginning of learning how to trade forex.
Now you know what they are, next you will learn how to identify them.
This method is very simple but effective to understand it at first. Eventually, you’ll be seeing these market structures without thinking about them.
You identify the forex market structure in two steps.
Firstly, load up any chart.
Once the chart is loaded, it’s time to identify the structure.
Step 1: Find where the market is moving towards. Is it going upwards or downwards? Plot a line showing the direction. This give you the general idea of what you are looking for.
Upwards = higher highs and higher lows
Downwards = lower lows and lower highs.
Step 2: Identify the key higher highs. This is achieved by only plotting a new higher high after the market has pulled back and created a lower high.
You can do this by simply drawing a zig-zag pattern between the lower highs and the higher highs to confirm this.
Step 3: Identify the key higher lows. The secret behind this is to only count the higher low as part of the structure if there are two or more bear candles identifying this. If it is just one, then we consider this as not significant and wait until another higher lower is formed.
In the example above we go through each step. Can see how the trend has structured now? By following this basic approach, you will capture this knowledge and be able to use it in no time.