As a trader, one of the most crucial skills you must possess is the ability to read and comprehend market structure, particularly market trends. This skill enables you to apply the right price-action strategies in different market conditions, and as the saying goes, “The trend is your friend until the end.”
Market structure refers to how the market behaves during a specific period of time. It helps us determine who is in control of the market—bulls or bears. Analyzing market structure is a valuable tool used by many investors to decide when to enter, exit, or stay away from the market.
By closely observing price action, three main types of market structures can be identified: trending, ranging, and choppy. In this article, we will delve into each of these market types to help you recognize and understand them better, enabling you to make more informed decisions while navigating the charts.
Trending markets are aptly named for their distinctive pattern of repeated upward or downward price movements. An uptrend is characterized by a sequence of “higher highs and higher lows,” signifying a continuous upward movement, while a downtrend exhibits “lower highs and lower lows,” representing a consistent downward movement. Let’s explore some examples to illustrate these sequences.
As seen in the example above, the market is forming a pattern of higher highs and higher lows, which clearly indicates that the market is currently experiencing an uptrend. This pattern signifies that the trend has gained “bullish momentum,” suggesting a trend where prices are consistently rising due to a surge in new buyers entering the market at progressively higher prices.
On the contrary, in the provided example, the market is clearly in a downtrend. The “lower highs and lower lows” pattern signifies a weakening support, leading to a decline in price levels. This market structure demonstrates a bearish momentum, with new sellers entering the market and driving prices lower.
In general, identifying market trends is relatively straightforward: Higher lows and higher highs indicate an upward market movement, while lower lows and lower highs suggest a downward trend. In future articles, we will delve into more comprehensive explanations of market movements, including cycles and theories like Elliot Wave counts, which provide insights into the price movements over time.
What Are Ranging Markets?
Ranging markets, sometimes humorously referred to as “straightforward” (pun intended), are characterized by their sideways movement or accumulation phases, where the price drifts horizontally for a period of time.
This market structure can be observed in various scenarios, such as when the market has reached its peak after an uptrend, during consolidation phases between further up or downtrends, or when the market is reaching a bottom after a downtrend.
In this phase, neither buyers nor sellers have a clear advantage, resulting in a momentary equilibrium point between two price levels where supply and demand meet. During this time, the market is essentially undecided and lacks a clear direction.
The chart above illustrates a classic example of a ranging market, where the price remains confined between two distinct support and resistance levels. This specific pattern resembles an ‘M’ or double top formation. In this scenario, the market attempts to break through a price level twice, having initially breached the resistance. However, it gets rejected at the upper price boundary, causing the price to reverse and fall. As a result, the trend changes, and the price loses a crucial support level by forming a lower low on this particular time frame.
Trading in ranging markets differs significantly from trading in trending markets. The primary reason for this difference is that ranging markets can switch direction unpredictably and at short notice. While an uptrend often concludes with a double top (similarly, a downtrend concludes with a double bottom), a consolidation phase can prolong before either buyers or sellers lose control. In such situations, as mentioned earlier, it is prudent to wait for confirmation before making any assumptions about the market’s direction. This confirmation is typically achieved using Exponential Moving Averages (EMAs) and key price levels, which we will delve into in the upcoming week.
What Are Choppy Markets?
Choppy markets are characterized by a period of high uncertainty, where the price lacks a clear direction. During this phase, there is no definitive intent from either the buying or selling side. Unlike ranging markets, choppy markets do not exhibit identifiable support or resistance levels. The example below illustrates a choppy market. In such conditions, traders often encounter challenges in making confident trading decisions, as the price swings unpredictably without establishing a clear trend.
Market structure is a fundamental element that every chart analyst must grasp. It plays a significant role in decision-making and should always be taken into consideration. It’s essential not to complicate matters by impulsively reacting to every price surge or drop. Instead, waiting for confirmation, like observing a higher low after a series of lower lows, can provide valuable insights into the market’s current situation. This approach is especially crucial during choppy market conditions; patience is key.
Remember, the market is ever-present, and missing one opportunity may lead to another. The primary takeaway from this article is understanding the three general market structures: uptrend with higher highs and higher lows, downtrend with lower highs and lower lows, and sideways movement or choppiness, which can be identified through support and resistance zones.
Experience and practice are vital to becoming a successful chart reader. Technical analysis is not foolproof and should be used at your discretion. This series of trading articles aims to educate the community and should be seen as an educational tool.
In our next issue, we will explore EMAs, a crucial tool used by both traders and market makers. Stay tuned for more insights!
Bryan indulges in every bit of crypto-related news
and material he can lay his hands on. As such, he
often shares his views and advice through the onXRP content platform. He is a firm believer in crypto’s
potential in the financial and economic world. With
5 years of experience in investing and trading Bryan
brings excellent insights to the table. He is excited to
bring much of this knowledge and many of his
skills to the onXRP platform.