Trading The Market Structures

Market Structures

The Market Structure concept is simple, yet a very powerful structuring concept. Markets have structures and traders miss most cues as they are constantly hunting some pattern, momentum, oscillator or some Zen-type signals. 

Market Structure formation is a price phenomenon occurring at major turns. 

Prices start with a wave (lets say Up) and it ends at some point and then there is a down-wave, and it ends some time and then begins another up-wave. These wave formations start with the Market Structures. 

Market Structure Low (MSL) and Market Structure High (MSH) formation is continuous and is repetitive at every wave begin and at every wave end.

Market Structures form in all markets, in all time-frames and in all instruments. They fail and re-fail, form and re-form. Market Structure is a concept pattern. It needs other indicators, support/resistance levels, triggers to confirm the theory and its works.

Market Structures are well explained with Candlestick charts. Market Structure Low (MSL) is explained with three candle pattern. A new low, lower low, higher low of CLOSE. A MSL based long is triggered when prices close above the highest close value. A stop is being placed below the low of the MSL to protect the trade.

Market Structures High (MSH)

A Market Structure High (MSH) is formed when markets are making major tops. The form near key resistance areas or key moving average levels, which is very significant. 

There are many theories of using MSHs in trading. 

One theory of MSH, is to find a critical resistance area and trade a short position. 

The other way is to find a series of past MSHs and build a trend line for resistance. The third way is to use MSH in a fractal wave form and build a larger wave structure using the distances between them.

The Market Structure High (MSH) definition is when markets make a new high followed by higher high followed by lower high. This pattern is shown with a three candle pattern. But many cases it may not be. It can form in 5-6 candles in a time-frame, but the internal candles should be mostly inside-bars suggesting indecision.

Trade:

A MSH short trigger (after 3-bar MSH formation) is signaled when price closes below the low of the third candle.

Stop:

Place a "stop" order above the MSH pattern's high.

Target :

There are two ways to target MSH shorts. 

One is to trade until another MSL forms near a key significant level. 

The second method is to trade with trailing stop using the previous bar's high as the stop.

Trading Market Structure High (MSH)

The example above illustrates a Market Structure High (MSH) formation from the EM 610 tick chart. 

On March 14,2007, at around 9.35am7 EM formed a Market Structure High to signal a potential top at 780 level. A short trading opportunity is presented when prices closed below the low of the third candle.

1. Enter a "short" trade below the low of the third candle at 778.

2. Place a "stop" order above the MSH high at 780.2.

3. Target is dynamically changed and traded until the prices form either another MSL, or if the price closes above the previous bar's high after an initial profit.

Trading Market Structure Low (MSL)

The example above shows a MSL formation from the Dow EMini futures (YM). In October, 2005, YM made a MSL formation after a long downtrend around 10700 level. This MSL is confirmed when the price closed above the high of the third candle.

1. Enter a "long" trade above the high of MSL at 10850.

2. Place a "stop" order one-tick below the low of the MSL at 10650.

3. Target a reversal MSH formation or when price closes below the low of previous bar.

Trading Market Structures

The example above illustrates a Market Structure trading formation on Russell Emini futures (ER2) weekly chart. In April 2002, ER2 formed a Market Structure high at 560 level. 

A short trading signal was triggered the following week at 540 level. A stop is placed above the high of MSH at 565. A profit level for MSH trading is set either at a previous swing low or MSL level, or until another MSL is formed to reverse its trend direction. 

A similar trading opportunity for MSH is presented again in December 2002. A MSL trading opportunity is shown in April 2003 around 420 levels. A stop loss is set at MSL low (at 390).