How To Read Market Structures In Forex

The ABCs Of Market Structure

The first principle is the most obvious one, and it states that for a market to be in an active cycle, it’s most recent structure must be one where price prints a high that breaks the previous high (in the case of a bullish cycle). On the flip side, a down-cycle will be established if the latest swings low in price breaks below the most recent low. In this hourly chart below, you can clearly see the EUR/USD in a down-cycle phase on lower lows and lower highs.

Minimum Of Two Closes Beyond Last High/Low

To confirm that a bearish trend or down-cycle is evolving in a healthy manner, not only we need to see the low printed being lower than its previous low, but we also should expect at least two closes beyond that low or support area as further evidence that the market is accepting and building value. Failure to print at least two closes may be a precursor to what’s often referred as head-fake or false breakout, and while the move still holds its merit to qualify as a new low in the cycle, the quality of the leg is poor in nature.

Don’t Lose Sight Of The Forest For The Trees

You must, by all means, avoid the trap of being short-sighted by only sticking to one chart analysis. When conducting your market structure studies, it’s all about building a thesis about a particular direction by finding concurrence from higher time frames down to your trading time frame.

Developing Rules to Validate Cycles

This is a key point that often gets overlooked by market participants by letting too much guessing play a role. When analyzing the charts, how do we determine what constitutes a relevant swing high/low? We need to find a mechanical approach that will allow us to qualify what we understand by relevant swing highs or swing lows in the chart.

Trendlines: A Visual Representation Of The Cycles

Did you notice in the hourly EUR/USD example how I ignored a higher high printed? Now compare it with another illustration below where it’s drawn — blue circle — with the two closes above supposedly confirming a new up-cycle, right? However, if you were to think about a potential reason why buyers failed so miserably on the attempt, you wouldn’t go wrong if you are thinking about the conflict against higher time frames (pointing down). However, there is another rule of thumb you must incorporate. If on a downtrend we make a higher high as in the case of the EUR/USD, but this high fails to break the descending trendline, be extremely cautious as more often than not, it can easily lead to a quick reversal in line with the dominant cycle. The power of a trendline lies not only in its capacity to provide an entry trigger but as a blueprint to help you understand the type of dominant market flows and potential locations to engage upon your own models.

Transitions: From Trends To Ranges

We’ve come to the point in the market structure where the dominant flows start drying up due to increased profit-taking, change in ebbs and flows due to removals of liquidity, intervention by market-makers, economic data-driven moves, etc. While in a down-cycle, the interpretation of the chart is straightforward, when is it that we can say with certainty that we’ve transitioned from a trend into a consolidation?

Magnitude Of The Cycle

Another major clue that will help us determine the health of the cycle is the type of progress made by the dominant side in control of the cycle. In this section of the analysis, we need to ask the following question: Are the new legs in the cycle increasing or decreasing in magnitude? Despite having entered a period of consolidation in the EUR/USD hourly chart, the latest swing low, if we were to measure its extension from the last high to the newly established low, saw a slide worth 128 pips vs the previous leg down, which only achieved a move of 120 pips. This carries an important message: The most recent flows communicate that sellers are increasing its commitment on each new cycle low (greater supply imbalances), therefore, this is yet another clue that the risk should stay skewed to the downside.

Velocity Of The Cycle

When it comes to the distance the price moves, the magnitude is only ½ the equation. The other ½ has to do with the velocity of the move or the speed. Was the new leg created after a fast and impulsive move? Or did price make a new low or high with the movement being sluggish, compressive and taking too long to form? A good rule of thumb is to count the number of candles it took to achieve a new leg. In the illustration below, you can see how it took 21 hourly bars to achieve 120 pips vs 18 bars to net 128 pips. Bottom line: The cycle continues to prosper in a healthy manner.

Projection: Targets In A New Cycle

By far, the most accurate measure I have found to set targets (partial or full take profits) when trading cycles is to measure the 100% fibonacci projection from the most recent valid swing high to its low. Note, there will be enough cases when events outside one’s control will cause prices to fluctuate erratically and not achieve these targets. Don’t forget to also factor in potential hurdles in the form of higher time frame support/resistance areas. You should see these levels as simple guides but far from certain outcomes. If the cycle continues in the expected direction, you will start to appreciate the power and usefulness of these targets to consider taking profits or trailing stops in hope of an ever larger yield in your trade.

Cluster Of Levels Nearby

Another must-do exercise for every trader to perform is to draw the most immediate lines of support and resistance — at least 2 up and 2 down — based on a top-down analysis. They should be obvious to spot.

How To Trade Market Cycles

The real power lies in the congruence of factors from a top-down approach, aiming to have as many aligning in your favor as possible. In the example of the EUR/USD exercise, the down cycle in the hourly had the backing of the H4 and daily cycles as well, which undoubtedly reinforces the chances of picking the right direction to trade. Now, does this mean that the bearish market structure in the hourly will be respected? Not at all. Remember that each individual trade is just a random event within the context of an exploitable edge. However, by conducting the proper market structure analysis, you do obtain that edge in terms of the location to engage that can offer a relatively low-risk entry for a potentially much larger yield.

How To Trade Ranges

When the price starts trading confined in a box or consolidation phase, we know this is a period of reassessment before the next directional move. Unless a breakout occurs, the only area where you really want to engage as part of a range include the upper or lower edge. A useful exercise to conduct every time the price fluctuates within a range is to draw a 50% fib retracement, and start to observe what side of the range the price spends the most time at. Is is the lower half or the higher half? The side where price usually spends the most time tends to be the most vulnerable for a price breakout. See below a recent example when the EUR/USD entered a range between Sept 21–28. Notice how the attempts to trade above the 50% fib retracement of the range were consistently rejected while price would accept below?


By now you’ve hopefully come to grips about the importance to keep your charts neat and clean, away from unnecessary indicators while embracing the power of reading market structures in a proper way. You have also gained enough knowledge to ultimately, through your own analysis based on a rules-based approach, find these low-risk areas to enter trades.

Extra Bonus (Practical Exercise)

I also took the time to work out the latest market structures in EUR/USD via Tradingview, based on the principles taught in this latest tutorial. Additionally, I’ve also produced a video walk-thru exercise via YouTube.

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Global Prime is a Forex and CFD provider specialising in low latency connectivity to tier-1 bank liquidity/ECNs

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Global Prime

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Global Prime is a Forex and CFD provider specialising in low latency connectivity to tier-1 bank liquidity/ECNs

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