Market Structure in Trading

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Market Structure in Trading

In this article, I will discuss Market Structure in Trading. It is the second part
of Technical Analysis. Please read our previous article, where we discussed Technical
Analysis Part 1. At the end of this article, you will understand the following pointers.

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1. What is the Market Structure in Trading?
2. Principles of Market Structure
3. Elements of the Market Structure

What is Market Structure in Trading?

Market structure gives us bias for trading opportunities. In the bull market, we
always look to buy dips.
Range market we look for buy low sell high

Principles of Market Structure

1. Price moves within a structural of support and resistance.
2. A breakout of the structural of support or resistance will lead to price movement in
the next area of the support or resistance.

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Elements of the Market Structure
The market structure consists of

1. Phases
2. Trend

Phases
How does the market really work?
All financial markets work on the universal law of Supply and Demand.

Law of Demand– The higher the price of an item, the fewer the demand (buyers don’t
want to buy at a higher price), and lower the price, higher the demand (buyers want to
buy at a low price)

Law of Supply– The higher the price of an item, the higher the supply (sellers want to
sell at a higher price), and lower the price, lower the supply (sellers don’t want to supply
at a lower price

So prices go up to find sellers and then go down to find buyers

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Let’s think from the perspective of smart money

What is smart money?

Smart money is nothing but professional money, big hedge funds, and institution’s
If you want to be a successful trader, you have to understand where these smart
money place themselves and where their orders are
If you don’t know this, you might get trapped by smart money

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The price goes through 4 Phases
1. ACCUMULATION
2. UPTREND
3. DISTRIBUTION
4. DOWNTREND

ACCUMULATION
Accumulation means removed from the floating supply of stock by buying
Demand coming in to gradually overcome and absorb the supply and to support the
stock at this level

How smart money do that? they buy as much of the stock as possible without significantly
putting the price up against their own buying until there are few or no more shares
available at the price level they have been buying at

Accumulation generally takes place within a well-defined congestion area, where the
stock appears to have no interest in either moving up or moving down. The smart money
ensures that the stock is contained below a certain upper level which is the supply area.
At the same time, the smart money also supports the prices above a certain lower line,
which is the support area.

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How does trend change?
Stopping action(stopping the downtrend)
Change of character(strength of trend change from bearish to bullish)
Testing of supply(testing supply whether present or not)
Mark up(if no supply is found in testing action )

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We will discuss this in depth in later sections. There are many other patterns that signify
accumulation. Some of them are

rounding bottoms,
reverse head and shoulder
double bottoms patterns
triple bottom pattern

UPTREND
Once the supply observes by smart money. When general market conditions appear
favorable, Smart Money can then mark up the price of the stock at some point in the
future.

First, the market breaks out from the end of the accumulation phase, moving steadily
higher with average volume. There is no rush as the insiders have bought at wholesale
prices and now want to maximize profits by building bullish momentum slowly, as the bulk
of the distribution phase will be done at the top of the trend, and at the highest prices
possible. Again, given the chance, we would do the same.

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DISTRIBUTION
Smart money will take advantage of the higher prices obtained in the rally to take profits
by beginning to sell the stock back to the uninformed traders/investors.

Opposite of the accumulation process

DOWNTREND
Once the distribution completed. the Smart Money can then mark down the price of the
stock At some time in the future. Let’s combine all phase

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So, let’s try to put the above phases with nifty 50

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This is all the smart money is doing, they are simply playing on the emotions of the
markets which are driven by just two. Fear and greed. That’s it. Create enough fear and
people will sell. Create enough greed and people will buy. It’s all very simple and logical

This cycle of accumulation and distribution is then repeated endlessly, and across all the
time frames. Some may be major moves, and others minor, but they happen every day
and in every market

Trends:
Let us first understand what is a trend. In a healthy bull trend, the upswing generally
exceeds the downswing in length and makes a higher high and higher low, the reverse is
true for the bear market.

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WHY Trend Analysis for Trading?

Trading against the trend, without a trend, or poor quality trends are one of the most
common reasons traders fail.
The quality or strong trends have more predictable success (edge)
Controlled arrangement of price bars and pullbacks provide greater certainty that
reverses at supply and demand happen

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 Poor or weak trends have lower predictability
An uncontrolled arrangement of price bars and pullbacks into supply and demand
lessens the chances of a reversal.

Determining the market trend

According to Dow Theory, the market has three trends

Primary trend: In Dow Theory, the primary trend is also considered as a major trend in
the market. It has a long-term impact

Secondary trend: Dow calls a correction in the primary trend as a secondary trend. In a
bullish market, the secondary trend will be a downward movement and in a bearish
market, it will be a rally.

SHORT TERM trend: The Minor Trend is a corrective move within the secondary trend

Which time frame trend is best?

It depends on what time frame you are looking at.

Larger Timeframes establish and dominate the trend.
If we are looking at the daily time frame and the price is making higher highs and
higher lows, we are in the bull market.
But if we are looking at a retracement of that bull move in 30 minutes time frame we
might be a short-term bear market even though overall market is bullish.

Let’s do an example

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The Ultimate objective of technical analysis is to find the location of trend and
trade according to the trend

Some of the tools that are used for technical analysis are

Swing(the building block of trend)

Support and resistance
supply and demand zone
trend line
pattern
gaps

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 volume
open interest
signal candle for entry

Please watch the following video to better understand the Market Structure in Trading
concept.

In the next article, I will discuss Market Structure Through Swing. Here, in this article, I
try to explain Market Structure in technical Analysis. I hope you enjoy this Market
Structure in the technical Analysis article.

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About the Author: Pranaya Rout

Pranaya Rout has published more than 3,000 articles in his 11-year
career. Pranaya Rout has very good experience with Microsoft
Technologies, Including C#, VB, ASP.NET MVC, ASP.NET Web API, EF, EF Core,
ADO.NET, LINQ, SQL Server, MYSQL, Oracle, ASP.NET Core, Cloud Computing,
Microservices, Design Patterns and still learning new technologies.

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