Market Structure

Market structure is a strategy for categorizing market phases so that we can determine what to do in various market scenarios. To put it another way, market structure advises us whether to buy, sell, or remain out of the market.

Market structure is an ancient concept that has existed for as long as there have been financial markets. On the other hand, the essential notions continue to be critical, especially when it comes to analyzing price movement and identifying trading opportunities. Understanding market structure aids in identifying upward, downward, and sideways movements. The same concepts apply to all markets, including stocks, futures, foreign exchange, commodities, digital assets like cryptocurrencies, and physical assets like real estate.

Each financial market structure has four phases, referred to as a "market cycle," which refers to trends or patterns that arise throughout distinct market or business settings. These market cycles are normal and will inevitably rise and diminish over time. Let's take a look at each one individually.

A "market cycle" is the time span between a market's peak and low and its stages. Market cycles occur in all financial markets. It's a natural cycle that will surely come and go as time passes. Every market has cycles that are classified into phases. Prices rise, peak, fall, and eventually bottom out, signifying the beginning of a new cycle.

Because novice traders may be unaware that markets are cyclical, they often fail to prepare for the end of the current market cycle. Furthermore, even if we understand market cycles, forecasting the top or bottom of a particular cycle might be challenging. However, in order to maximize our trading earnings, we must first understand the cycle. Let's look at the four primary phases of a typical market cycle and how to recognize them.

• Accumulation Phase (Range market in a downturn)
• Mark-Up Phase (Bullish Market)
• Distribution Phase (Range market in an upswing)
• Mark-Down Phase (Bearish Market)

This phase occurs after the market has declined from its previous peak. As the price decreases, optimistic traders continue to buy, resulting in a buying rush in the market. The bears, on the other hand, kept selling in the belief that the slide would continue. This conflict between bulls and bears has brought the market to a halt, giving it the appearance of a "range market" in a downturn.

Although the market is now in a phase of accumulation, this does not necessarily guarantee that it will break out higher. It might fail at a lower level. So, at this point, we have two choices:

• We may seek for purchasing chances when the market is at a support level or when the price breaks through resistance.
• When the market hits resistance, we may search for selling chances.

The accumulating phase has come to an end, the market has been stable for some time, and prices are starting to climb. Because of the continuation of increasing highs and lows, this period is also known as an uptrend in market structure. However, the market is still battling to make large price increases since there are always sellers ready to impede the advance.

At this point, most traders are aware of the trend and are looking for opportunities to buy. However, no market can continue to climb eternally; eventually, it will show signs of weakness, and the trend will move to the next stage.

In the third stage of the market cycle, sellers seize power. During this phase of the cycle, the previous phase's good sentiments give way to a mixed mood. Prices might get stuck in a trading range for weeks or months at a time. As the price increases, the bears will look for a selling opportunity, while the bulls will continue to buy in the belief that the trend will continue. As a consequence of the bull-bear war, the market has reached an equilibrium point, and it seems to be a "range market" in an upswing.

The trend may continue and the price may break higher following this phase, but it may also break down. So, at this stage, we have two choices:

• If the market price breaks above the resistance level, we will presume that the trend will continue and search for a buying opportunity.
• If the market price falls below support, we will assume the range market will continue and look for a selling opportunity.

We'll enter the last phase if the price goes below the range's lows.

For those who are still working, the fourth and final stage of the cycle is the most grueling. The investors that are caught up in this period are often new and inexperienced. They remain with their investment despite the fact that it has lost a significant amount of value since they purchased it. This set of investors, who often buy during the distribution phase or the beginning of the markdown phase, may only sell if the market falls by 50% or more. When this happens, late-cycle traders lose hope and gradually cut their losses.

This phase is also defined by a decrease in the market structure, with a series of lower highs and lows. At this time, most traders spot the trend and begin hunting for selling opportunities. No market, however, is constantly down; at times, it will begin to show signs of strength, and we will return to the first phase.

Price action trading allows us to have a better knowledge of the market and make more profitable trading selections. Using the price action trading method may help us more precisely locate our entry and exit points. When trading price movement, four factors must be considered: market structure, area of value, entry trigger, and stop loss. And the most critical aspect to comprehend is market structure.

A trader must first grasp market structure in order to trade price movement. We won't be able to buy, sell, or stay out of the market if we don't understand it. Understanding market structure, on the other hand, opens up a world of possibilities for us.