Trend and market structure

In the first course you saw that a trend shows in its highs and lows. Now we turn that into a tool. Instead of a feeling that "it is probably going up", you mark specific points on the chart and use them to say which phase the market is in. This is called market structure.

Clear highs and lows#

Price never moves in a straight line. It goes up, pulls back, goes up again. Every peak where the price turned down is a high, every bottom where it bounced up is a low. They are also called swing highs and swing lows.

Do not count every small wiggle. Look for points you can see at first glance – for example the highest price for several weeks on each side.

Rising and falling structure#

• Rising structure – every new high is above the previous one, and so is every low. Buyers are in control.
• Falling structure – lower highs and lower lows. Every attempt to rise ends lower than the last one.
• Range – highs and lows stay at roughly the same levels.

Example: Bitcoin 2022–2023#

2022 was a textbook decline. A high of 48,190 USDT at the end of March, then a lower high in May (32,399) and another in August (25,211). The lows fell too: 26,700, 17,622 and, after the collapse of the FTX exchange in November, as low as 15,476.

When a trend breaks#

A downtrend ends when the price breaks the last lower high. This is called a break of structure. On the chart above, the last lower high was 18,388 from 14 December. On 12 January 2023 the daily candle closed above it (18,847) – and eight days later also above the November high of 21,481.

A break of structure does not mean a big rally starts now. It is only an early warning that sellers are losing strength. Look at March 2023: the price fell to 19,549 – below the February low. The rising structure broke for a while, and yet the market reached 31,000 in about five weeks.

How to use it#

• Trade with the structure, not against it. Buying "the bottom" in a falling structure is a bet against the trend.
• Structure gives you a place for the stop-loss. In a rising structure it typically goes below the last higher low – if the price breaks it, your idea no longer holds.
• Start with a longer timeframe. On an hourly chart you will find dozens of "breaks", on a daily chart only a few that matter.

Common myths#

• "It is down a lot, it has to go up." A low price is not a signal. In 2022 Bitcoin looked cheap at 30,000 – and then at 20,000.
• "One higher low = a new trend." One swallow does not make a summer. Wait for a break of structure.
• "Structure always works." March 2023 shows that even the nicest structure can break for a while.