Regardless of the strategy you use when trading it’s important that you are able to identify and define market structure. Price on a chart is a reflection of human behaviour and emotion, and as they do in any market place the rules of supply and demand reign supreme.
Once you’ve learned how to read price structure you can start to anticipate what might happen next. We say ‘might’ as there are never any guarantees but the more you look at and actively try to read price movement the more you will see repetition and this is something that can be acted upon if it fits in line with your strategy.
As price evolves it will reveal information about the buyers and sellers and who is ultimately in control. The first impression of the blank chart below is that it doesn’t offer much in the way of information.
A core part of our strategy is to identify swing points and support and resistance levels. These concepts are absolutely fundamental to market structure and can provide key clues as to where price may head next. In the chart below we’ve highlighted these areas.
Already we can see some structure in the chart, adding these support and resistance lines shows that price often reacts to these areas multiple times. When you spend time observing the markets you will see this occurring over and over again and therein lies the opportunity to trade. The next chart example shows that when support is created, and then subsequently broken, it often turns into resistance and vice versa.
After many hours of time in the markets you will develop an intuition as to where price may be heading. It’s important not to react on this however and wait until the rules of your strategy are met before taking a trade.
The next chart shows a rising trendline with price making higher lows, we can also see that as price moves up it’s also into a resistance level. It’s clear to see that there is high likelihood price is going to break upwards as the resistance levels becomes weaker the more time it is hit. This does in fact happen and as discussed previously the resistance becomes support, the resulting move from the new support zone is significant!
It’s important that you build time into your routine for properly analysing your charts and identifying the market structure. This only comes with practice but the more time you put in the more you will learn how price moves and how you can potentially profit from that.