Welcome to a much more advanced and exciting T.A class.
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MARKET STRUCTURE
The Price Action SchemeWork.
You’re about to learn more interesting things about Price Action, and how to
analyze and understand various market trends.
We’ve established that there can be only three trends in the market at any
given time, namely: Uptrend, Downtrend & Consolidation - sideways trend.
Now, you are about to understand the characteristics of a trend or any of
these trends in-depth. You see, price is telling a story, and each chapter of
the story has a name.
For every market trend, whether bullish, bearish or sideways - price action
will repeat these phases constantly.
This concept of Price Action was introduced by Michael J. Huddleston who
is popularly known as the Inner Circle Trader (ICT).
The following are the four phases of the cycle Price Action undergoes
every time:
1. Consolidation.
2. Expansion.
3. Retracement
4. Reversal
1. Consolidation: a price base where there are no evident highs or
lows being created, the market isn’t trending but at a state of
equilibrium, moving inside a clear trading range and shows no
willingness to move significantly higher or lower.
2. Expansion: this is when price moves quickly away from a level of
Equilibrium.
3. Retracement: this is when Price moves back inside the recently
created Price Range — it happens when price pulls back against the
trend before continuing. It can provide opportunities to enter trades at
better prices so you can trade with the trend. It can also be referred to
as a Pullback or Corrective movement.
4. Reversal: This is a change in direction of the market trend, when
Price moves the opposite direction that current direction has taken it.
For example, if the price of an asset or currency pair is in an uptrend,
a reversal would be a change to a downtrend.
In the financial market, there is a saying, “the Trend is your
friend.”
Learning how to read price action of a current market trend and
understanding even when the trend is exhausted and about to
reverse is Key.
● Price ALWAYS goes from a consolidation to an expansion.
● Price CAN go from an expansion into a retracement,
● Price CAN go from an expansion into a reversal.
● Price CAN go from an expansion to a consolidation.
● Price NEVER goes from a consolidation to a reversal.
● Price NEVER goes from a consolidation to a retracement.
To expand, price must ALWAYS first consolidate — every move
starts from CONSOLIDATION.
Here’s an illustration of the context or framework surrounding the
idea.
For a bullish market, price action moves repeatedly on the 4
phases to create Higher Highs and Higher Lows.
Originally a bullish market structure is noted by the creation of
new highs (HH) and the protection of old lows (HLs).
A typical bullish market structure.
Price creates market trends following these phases one step at
a time, it repeatedly goes through the four phases as, it begins
with a consolidation, then it expands, breaking a previous price
high or low creating new prices, it retraces (pulls back) then
consolidates for a while before expansion to continue the trend -
when the trend is exhausted, it reverses.
The same occurs for the new trend, price expands to the opposite
direction, consolidates, then expands again, pulls back then
expands again and continues the cycle with the new trend.
It’s all the same thing for the bearish market, the major
difference is for the bearish market, new lows are being created
in a bearish market and old highs are being protected.
A typical bearish market structure.
Having developed this model for you to see.
You are now able to understand the trend markup of a bullish &
bearish market.
Moving forward, for these structures, there are notable price
action characters that tell you a new high or low has been created
or failed to be created in the market.
These characters are labeled as
- the break in market structure. (New Highs or Lows)
- The shift in market structure (SMS)
- The change of character. (ChoCh)
- Stop Hunting (liquidity raid).
The Break in Market Structure:
The break in market structure abbreviated as BMS which can also
be labeled Break of Structure (BOS) occurs when the trending
price closes above / below a previous high/low creating a new
high or low - in a bullish market, new highs are formed, the point
at which the previous high was surpassed is the BMS/BOS.
The Shift in Market Structure:
The shift in market structure labeled as SMS occurs when there is
a trend in the market and the price fails to break the last high or
low and then proceed to break the previous low or high — a bit
tricky, eh? The illustrations will help but here’s it, consider an
uptrend market and the price fails to break the last high created
(fails to break market structure) but breaks the previous low (the
protected higher low), that is a shift in market structure & signals
a possible reversal or corrective move (retracement).
The Change of Character:
Also abbreviated as the CHoCH, it refers to a price action
behavior that signifies a potential change in market trend such
as a reversal from bullish to bearish trend or vice versa — every
time price is about to change from one trend to the other, there’s
the change of character price action.
This is a bullish Change of Character - it is the break of structure
that introduces the reversal from a bearish trend to a bullish
trend.
A bearish change of character.
Stop Hunt
Known by many names, stop hunting in the market is a raid of
liquidity in the market, where the manipulation occurs. Stop
hunting is a price action movement that drives price to a level where many
investors, traders and market participants may have set stop-loss orders -
usually a quick or false move to remove weak players or force some market
participants out of their positions before driving price to the intended
direction. It is annotated as SH.
It is the false move that most likely occurs before the change of character in
price action. Early buyers or uninformed traders who are long will first be
liquidated or taken out at Support before the buy sets in - first, it deceives
traders anticipating a sell or uninformed traders to think a sell price action
just began, thereby trapping late sellers in the pool and taking out buyers
also in the pool likewise at Resistance, early or uninformed sellers are
taken out, then late buyers or uninformed sellers looking to take a sell are
also trapped.
Bearish Stop Hunt
Bullish Stop Hunt
You have this book to read and reread for as many times you’d want to until
you get it right!
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Watch the Video for Market Structure for better understanding.
See you in the next class.
