Lesson 8: Market Structure - The Trend is Your Friend
Part of Module 3: Technical Analysis - The Art of Reading Charts
Introduction: The Market's Fingerprint
If candlesticks are the words, then market structure is the language. Market structure is the directional flow of price over time—it's the market's fingerprint, showing us where it has been and where it is likely to go. Understanding structure is the first step to building any trading strategy.
The Three Market Directions
At any given time, the market can only be doing one of three things:
- Moving Up (an Uptrend)
- Moving Down (a Downtrend)
- Moving Sideways (a Consolidation or Range)
Our job as traders is to identify the current direction and trade with it.
The Uptrend (A Bullish Market)
An uptrend is a clear sign that buyers are in control. It's defined as a series of Higher Highs (HH) and Higher Lows (HL).
Analogy: Think of it like climbing a staircase. You take a step up (a new high), then take a small step back onto a higher stair (a higher low), and then continue climbing. As long as you don't step back down lower than your previous step, you are still climbing.
The Downtrend (A Bearish Market)
A downtrend is a clear sign that sellers are in control. It's defined as a series of Lower Highs (LH) and Lower Lows (LL).
Analogy: This is like walking down a staircase. You take a step down (a new low), then a small step back up to a lower stair (a lower high), and then continue descending. As long as you don't step back up higher than your previous step, you are still going down.
Consolidation (A Sideways Market)
A consolidating market is a sign of indecision. The price is not making clear higher highs or lower lows. Instead, it is bouncing between a high price (resistance) and a low price (support). During this phase, neither buyers nor sellers are in clear control.
The #1 Rule: "The Trend is Your Friend"
This is one of the most famous sayings in trading, and for good reason. The highest probability trades are made when you trade in the direction of the main trend. In a clear uptrend, you should primarily be looking for opportunities to buy. In a clear downtrend, you should primarily be looking for opportunities to sell.