Market structure

Price does not move in a straight line. It advances, pulls back and advances again. Each turning point is a swing: a swing high where a rise stopped, a swing low where a fall stopped.

Market structure is the order in which those swings follow each other. The idea goes back to Dow theory, which defines a trend by its successive peaks and troughs. Smart money concepts use the same reading and add names for the moments when structure is extended or broken.

In an uptrend each swing high is above the previous one, and each swing low is above the previous one. A higher high shows that buyers pushed price to a new level. A higher low shows that they came back before the previous low was reached.

The uptrend holds as long as the last higher low holds. A close above the last swing high is a break of structure and confirms the trend.

A downtrend is the mirror image. Each swing low is below the previous one, and each bounce stops at a lower high. The downtrend holds as long as the last lower high holds, and each close below the previous swing low confirms it.

In a range price moves between a high and a low without making progress. Swing highs form at about the same level, and so do swing lows. Neither side is in control.

A range ends when a candle closes beyond one of its edges and price stays there. Until then the edges act as support and resistance, and a move through an edge that fails is a liquidity sweep.

A structure shift is the first break against the trend. In an uptrend it is a close below the most recent higher low. In a downtrend it is a close above the most recent lower high. Smart money concepts call it a change of character (CHoCH) or a market structure shift (MSS).

A shift is a warning, not a new trend. The new trend is confirmed when price makes the next swing in the new direction: a lower high followed by a lower low after an uptrend, a higher low followed by a higher high after a downtrend.

The Zigzag indicator connects swing points with a line, which makes the sequence easy to see. On Charts the Market Structure (BOS and CHoCH) indicator in the Smart Money group labels the breaks. It is included in Plus and Premium.

• Start on a higher timeframe – daily or 4-hour – and mark the obvious swing highs and swing lows.
• Label each swing against the previous one: higher high, higher low, lower high or lower low.
• Name the state: uptrend, downtrend or range. Mark the level that would change it – the last higher low in an uptrend, the last lower high in a downtrend.
• Move one timeframe down and repeat. The lower timeframe shows the swings inside each leg of the higher one.

• Direction – longs in an uptrend, shorts in a downtrend. In a range, trade from the edges or wait for the break.
• Entry – on the pullback: near the previous swing high that was broken in an uptrend, or at an order block or fair value gap inside the last leg.
• Stop – beyond the swing that keeps the structure valid: below the last higher low for longs, above the last lower high for shorts.
• Target – the last swing high or low in the direction of the trade, then the next one on a higher timeframe.

• Marking every small swing – structure then changes every few candles. Use one rule for what counts as a swing.
• Reading one timeframe only – a downtrend on the 15-minute chart is often a pullback in a daily uptrend.
• Treating the first shift as a reversal – many shifts are deeper pullbacks, and the old trend resumes.
• Trading the middle of a range – the distance to both edges is small and direction is unclear.