Intermediate · Lesson 2 of 11 · 7 min read
Market structure
Market structure is the pattern of swing highs and swing lows. It shows who is in control, and often shows a trend changing before most indicators do.
Swing highs and swing lows
A swing high is a peak with lower highs on both sides. A swing low is a dip with higher lows on both sides. Join them up and you can see the shape of the market at a glance.
Reading the trend
| Structure | What it means |
|---|---|
| Higher highs and higher lows | Uptrend: buyers are in control |
| Lower highs and lower lows | Downtrend: sellers are in control |
| Highs and lows at about the same levels | Range: neither side is in control |
Break of structure and change of character
A break of structure (BOS) is when price closes beyond the last swing in the direction of the trend, such as a close above the last high in an uptrend. The trend is carrying on.
A change of character (CHoCH) is when price closes beyond the last swing against the trend, such as a close below the last higher low in an uptrend. It is the first warning that the trend may be turning.
A trend is intact until it breaks the swing that built it. In an uptrend, watch the last higher low. In a downtrend, watch the last lower high.
Gold on the 1-hour chart makes highs at 4,020, 4,045 and 4,070, with lows at 3,995, 4,015 and 4,040: a clear uptrend. The next push only reaches 4,065, then a candle closes below 4,040, the last higher low.
That is a change of character. Traders stop buying the dips and wait to see whether a lower high forms. If it does, they may look for sells with a stop above that lower high.
Using structure in your trading
- Trade in the direction of the structure on your bigger timeframe.
- Look for entries on pullbacks towards the last swing, not at the extremes.
- Place stops beyond the swing that would prove you wrong.
Common mistakes
- Treating every tiny wiggle as a swing.
- Acting on wicks instead of closes.
- Treating one change of character as a confirmed new trend.
- Ignoring the structure on the bigger timeframe.
Check yourself
1. What does a pattern of higher highs and higher lows show?
An uptrend.
2. In an uptrend, price closes below the last higher low. What is that called?
A change of character (CHoCH).
3. Should a wick through a swing count as a break?
No. Wait for a candle to close beyond it.
Try it on BTM
For education only, not financial advice. Trading carries a high risk of losing money, especially with leverage. Only trade with money you can afford to lose.
For educational purposes only. Nothing here is financial advice. Past performance does not guarantee future results, and trading carries a high risk of losing money, so only trade with money you can afford to lose. Read the risk warning.