Forex Market Structures Explained
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Forex market structure refers to the price action that indicates the dominant bullish or bearish bias of the market.
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In a bullish structure, price is making progressively higher highs and higher lows, showing uptrend momentum.
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A bearish structure is characterized by lower highs and lower lows, indicating a lack of buying pressure.
If you're getting started in the trading world, one of the first steps is understanding the different structures within the Forex market.
In this article, we'll give you a market structure comprehensive overview, helping you decipher what various terms mean and how they connect to the bigger picture. We'll also break down
Different characteristics of markets
How they work, and
How traders can take advantage of them to achieve their financial goals.
So grab a cup of coffee, sit back, and dive into the nitty-gritty of Forex market structures!
What is market structure in Forex?
Market structure Forex is the framework that describes the relationships between buyers and sellers in the global foreign exchange market. Understanding market structure is essential for traders, as it provides clues to market sentiment and potential price movements.
Market structure refers to the patterns and relationships between the participants in the market, including different currency pairs and their respective trading volumes.
What Is Break Of Structure (BOS) In Forex Trading?Types of Forex market structure
Knowledge is power, and understanding these market structures can give you an edge in the fascinating and ever-evolving world of Forex.
Here, we’ll scour the bullish, bearish, and sideways market structures and provide insightful analysis of how each market may impact your trading strategy.
Bullish market structure
An upward trend in Forex trading activity characterizes a bullish market structure. Bulls have the upper hand in this market structure, with buyers who are optimistic about the market's future prospects.
A bullish structure comprises a higher highs (HH) series along with higher lows (HL). The trend sticks to the same direction until an asset price obtains a lower low (LL) series.
A bullish structure
An example: The daily chart for ETSY stock is displayed in the image below, illustrating the trend of higher highs and higher lows. However, the green box marks an instance where the asset's price reaches an equal low. For the upward trend to persist, the 250 tops must be surpassed.
The daily chart for ETSY stock
Bulls are bullish because they believe that the demand for a given currency will increase in the future, leading to an overall rise in price. This sentiment is often reinforced by positive economic news, increasing investor confidence, or a surge in trading activity.
Key features of a bullish market structure include a strong upward trend with rising prices and trading activity. Other components include high trading volumes, positive economic indicators, and an overall optimistic outlook from investors.
A bullish market structure is powerful in Forex trading, with a strong upward trend and positive buyer sentiment.
In this type of market, opportunities for profit and growth abound, and investors are eager to take on risks and capitalize on their bullish outlook. They say it's time to make hay when the bulls are running!
Bearish market structure
A bearish market structure in Forex is characterized by a downtrend where the bears take control of the market and push prices lower. This market structure is typically marked by lower highs and lower lows, with buyers losing confidence and selling pressure dominating the market.
Bearish market structures can be identified by several indicators, such as price action patterns, moving averages, and trendlines. The key components of a bearish market structure include
Lower Highs |
As the market moves lower, the swing highs progressively lower, reflecting the bearish sentiment. |
Lower Lows |
The lows also continue to move lower, creating a series of lower lows that indicate the strength of the bearish trend. |
Breakouts |
In a bearish market structure, prices often break below key support levels, triggering a cascade of selling pressure |
Momentum |
Bearish market structures often accompany strong momentum as traders rush to sell and take profits. |
Volume |
Volume tends to increase during bearish phases as traders look to exit positions and avoid further losses. |
A bearish market structure
Let’s exemplify the TESLA charts below.
the TESLA chart
Sideway
A sideways (aka a chop) market structure, also known as a consolidating market, is a type of market where the prices appear to move sideways within a relatively narrow range over a period of time. This market structure is often characterized by
Indecisive price action
Low trading volumes
Choppy and uncertain character and
Making it difficult to trade.
This indicates the presence of buyers in the market, who are driving the price up. The price’s horizontal movement is showcased by equal highs (EH) and equal lows (EL).
A sideways market structure
See the example below:
A sideway market structure
The features of a sideway Forex market structure are as follows:
Price action moves sideways within a relatively narrow range.
Decisive price action and low trading volumes characterize the market.
Determining the market's direction is often difficult, and traders may hesitate to place trades.
Prices will often test the range's upper and lower boundary multiple times before eventually breaking out.
Significant price movements can follow sideways market structures once a breakout occurs.
How to indicate market structure in Forex
Market structure can be indicated in Forex through various strategies and approaches. Here are some tips:
Pay attention to price action: You can understand the market structure by analyzing market movements and candlestick patterns.
Look at key levels: Identifying support and resistance levels can help give you an idea of the market's structure.
Assess market trends: Identify the direction the market is moving in and its strength.
Use technical indicators: Indicators such as moving averages, RSI, and MACD can provide insight into the market structure.
Consider market volatility: High volatility indicates structural changes in the market.
Market structure chart examples
The S&P 500's micro-structure can be observed in a 10-minute chart, which shows that the 4-hour levels are providing solid support and affirming the upward trend.
By using the bullish trend's higher highs and higher lows, traders can identify the level for a long continuation. The price may experience a pullback to either the previous broken top or the impulse that brought it to a new high.
The S&P 500's micro-structure
The daily chart of SPY clearly shows the presence of higher highs and higher lows.
The daily chart of SPY
How to use Forex market structure chart better
To use Forex market structure charts effectively, here are some tips for newbies:
Use multiple time frames
New traders can benefit from using multiple time frames, such as daily, hourly, and 15-minute charts. This will help them to identify the market structure over different time periods and gain a better understanding of the trend.
Analyze different assets
Traders can analyze multiple currency pairs to gain a better understanding of the market structure. They should look for similarities and differences in price action to determine the best trading opportunities.
Use technical indicators
Indicators can be used to identify trends, momentum, and potential reversal points. New traders should focus on a few key indicators such as moving averages, RSI, and MACD, and learn how to interpret them effectively.
Practice using demo accounts
Before using real money, new traders should practice using demo accounts to get comfortable with the platform and trading strategies. This will help them to build confidence and reduce the risk of making costly mistakes.
Watch for role reversals
When price breaks a key level, that level often flips to become new support or resistance. Pay attention to when support levels become resistance and vice versa.
Context is key
No single level or indicator will tell you when to enter or exit a trade. Use market structure in the context of overall price action and market conditions. Be patient for confirmations. Wait for price to confirm a level as support or resistance before anticipating a bounce or breakout. Don't assume a level will hold prematurely.
Why is understanding the structure of the market critical for a trader?
Many top traders emphasize that grasping the structure of the market is crucial in gaining a deep understanding of it. They consider it to be the cornerstone of market knowledge.
By analyzing market trends and patterns, traders can identify potential trading opportunities and make informed decisions. Ignoring or not understanding market structure can lead to significant risks and losses.
By understanding the market structure, traders can develop strategies that take advantage of price movements, such as identifying support and resistance levels, trend reversals, and breakouts. They can also use this information to manage their risk effectively by identifying potential areas of volatility or low liquidity.
For example, if a trader understands that the market is heavily dominated by buy orders, they may choose to take a long position, anticipating a bullish price movement. Alternatively, if they know that a market is highly competitive with numerous sellers, they may look for a short position, setting themselves up to profit on a bearish price movement.
Thus, it is paramount to know all the information when it comes to the question “what is market structure in Forex?”
Summary
Understanding the different market structures of the Forex market is crucial for traders and investors alike. The four main market structures are the spot market, forward market, futures market, and options market.
Besides, traders must also be familiar with the three types of market trends, which are the bullish market structure, bearish market structure, and sideway market structure. A bullish market structure is characterized by rising prices, while a bearish market structure is marked by falling prices.
On the other hand, a sideway market structure is where prices move within a narrow range without any significant upward or downward movement. By understanding these market structures and trends, traders can make informed decisions and minimize their risks when trading Forex.
FAQ
What are the major market structures of Forex?
The major market structures of Forex are bullish, bearish, and sideway market structures.
What are the 4 stages of the Forex market?
These comprise expansion, peak, recession (or contraction), and trough.
Is understanding the Forex market structure useful for beginners?
Yes, understanding the Forex market structure is useful for beginners as it helps in understanding the functioning of the market and the factors that affect currency prices.
How to learn Forex market structures?
To learn Forex market structures, beginners can stick to our advice on Forex trading, analyze the market structures chart, take online courses or attend seminars, and practice on demo trading platforms.
Glossary for novice traders
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Trading
Trading involves the act of buying and selling financial assets like stocks, currencies, or commodities with the intention of profiting from market price fluctuations. Traders employ various strategies, analysis techniques, and risk management practices to make informed decisions and optimize their chances of success in the financial markets.
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Upward Trend
Uptrend is a market condition in which prices are generally rising. Uptrends can be identified by using moving averages, trendlines, and support and resistance levels.
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Volatility
Volatility refers to the degree of variation or fluctuation in the price or value of a financial asset, such as stocks, bonds, or cryptocurrencies, over a period of time. Higher volatility indicates that an asset's price is experiencing more significant and rapid price swings, while lower volatility suggests relatively stable and gradual price movements.
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4
Broker
A broker is a legal entity or individual that performs as an intermediary when making trades in the financial markets. Private investors cannot trade without a broker, since only brokers can execute trades on the exchanges.
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Forex Trading
Forex trading, short for foreign exchange trading, is the practice of buying and selling currencies in the global foreign exchange market with the aim of profiting from fluctuations in exchange rates. Traders speculate on whether one currency will rise or fall in value relative to another currency and make trading decisions accordingly.
Team that worked on the article
Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.
As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).