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UNDERSTANDING
FOREX MARKET STRUCTURE

Price Action Method

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 Table of Contents
Chapter One: Market Structure
 Definition of Structure
 Meaning of Market Structure
 Market Structure Formation

Chapter Two: Types of Market Structure

 Uptrend (Bullish Trend)
 Downtrend (Bearish Trend)
 Sideways Trend (Ranging Market)

Chapter Three: Identifying Market Structure

 Breakdown and Breakout concept
 Reversal and Continuation patterns
 Trendline pattern

Chapter Four: Market Structure Phases

 Accumulation Phase
 Advancing Phase (Mark-up)
 Distribution Phase
 Declining Phase (Mark-down)

Chapter Five: Types of Trend

 Short-Term Trends
 Medium-Term Trends
 Long-Term Trends

Chapter Six: Risk Management & Psychological Factor

 Position Sizing
 Stop-Loss Orders
 Psychological factors and Discipline

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Chapter One

DEFINITION OF STRUCTURE
The term "structure" originates from the Latin word "structura," which
means "fitting together of something" or "building." While it's often
used in the context of physical constructions, the concept of structure
goes beyond tangible objects. It also applies to how elements are
arranged or connected in abstract ideas, systems, or processes.
Structure essentially defines how components form a whole, guiding
how that whole functions or how it behaves.

Line chart structure

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 Meaning of Market Structure

In forex trading, market structure refers to the recognizable patterns

and price movements that occur over time in the currency market. This
structure represents the dynamic interaction of buyers and sellers,
shaped by economic data, geopolitical events, and market sentiment.
Understanding market structure is essential for traders because it
provides insights into the ongoing battle between supply and demand
forces, which ultimately drive price action.

Trends (Uptrend, Downtrend, Sideways Trend)

Characterized by highs and lows, indicating strong buying or selling

interest and the overall sentiment of the market direction.

The diagram below shows the average market Structure of a chart,

showing how it influences the trend.

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Here structure shows us how price trends downwards, upwards, and in

a sideway direction. In the next chapter, we break down these trend
phases individually.

Bullish market structure

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 Chapter Two

TYPES OF MARKET STRUCTURE

There are three (3) ways market structure can form Uptrend,
Downtrend, and Sideways:

Uptrend (BULLISH Trend): Characterized by higher highs and higher

lows, indicating strong buying interest and overall bullish sentiment.

Downtrend (BEARISH Trend): Defined by lower lows and lower highs,

reflecting dominant selling pressure and a bearish outlook.

Sideways Trend (Range): Occurs when prices move within a defined

horizontal range, signaling a balance between buyers and sellers.
Traders often use range trading strategies, buying at support and selling
at resistance.

Trends are the most fundamental aspect of market structure, reflecting

the overall direction of price movement over time. Understanding
trends allows traders to align their trades with the market’s dominant
direction, which increases the likelihood of success.

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Bullish Trend on line chart

Bullish Trend on Candlesticks

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 Bearish Trend Line Chart

Bearish Trend on Candlestick Chart

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Sideways trend on line chart

Sideways range on Candlestick chart

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 Chapter Three

IDENTIFYING MARKET STRUCTURE TRENDS

Breakout and Breakdown concept

Breakouts and breakdowns are critical concepts in trading that signal

potential opportunities for traders to enter or exit the market. They are
pivotal moments that often lead to significant price movements,
making them essential elements of market structure. Let’s delve into
each:

Breakouts: These happen when the price breaks upward from a range
in an uptrend or a consolidation trend. Breakouts indicate a shift in
market dynamics where buying pressure overcomes selling pressure as
the price moves above a defined resistance level or a significant price
pattern boundary leading to a potential upward move.

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Breakdown: A breakdown is the opposite of a breakout. It occurs when

the price falls below a defined support level or the boundary of a price
pattern. Breakdowns indicate that selling pressure has overwhelmed
buying interest, often leading to a downward move. It happens when
the price drops below a support level, which previously acted as a floor
preventing further price declines.

Reversal Patterns

Reversal patterns are technical chart formations that signal a potential

change in the prevailing trend direction, whether from an uptrend to a
downtrend or vice versa. Recognizing these patterns can provide
traders with early warning signs that a trend is losing momentum and
about to reverse, allowing them to position their trades accordingly.

Typical reversal patterns

Market Structure Shift (MSS): A Market Structure Shift occurs when

the established pattern of highs and lows within a trend is disrupted,
signaling a potential reversal or significant change in market sentiment.

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In an uptrend, this disruption is evident when the price, which has been
consistently making higher highs and higher lows, starts to falter. For
instance, instead of forming a new higher high, the price begins to
create lower highs, suggesting that buying momentum is weakening
and a downward trend might be emerging.

This shift is more than just a random price movement; it reflects a

deeper change in the underlying dynamics between buyers and sellers.
When an uptrend fails to make a new higher high after a pullback, it
reveals that the bulls are losing control and the bears are starting to
assert influence. This change is visually confirmed when the market
prints a lower high, breaking the previous rhythm of the trend.

Bearish Market Structure Shift (MMS)

For a market structure shift to be fully validated, the price must also
produce a new lower low, which would signify a definitive change in
trend direction. This lower low represents a breakdown of the previous

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support levels and confirms that the bears are now dominant. The
alteration of the trend channel reinforces this shift, indicating that the
previous market structure has been decisively overturned and a new
trend phase has begun. Monitoring these structural changes enables
traders to anticipate potential reversals and adjust their strategies
accordingly, enhancing their ability to navigate evolving market
conditions.

A Bullish Market Structure Shift (MSS)

Market structure shift emphasizes the psychological shift occurring in

the market and how it reflects the changing control between buyers
and sellers, adding depth and clarity to the concept of Market Structure
Shift.

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Change of Channel (CHOCH): When price behavior indicates that an
emerging trend is taking hold or that the current trend is losing steam,
this is known as a Change of Character. The pattern of highs and lows
that defined the preceding trend is usually broken to indicate it.

Bearish and Bullish CHOCH

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A Bearish Change of Channel (CHOCH)

A Bullish Change of Channel (CHOCH)

Continuation Pattern

Continuation patterns are chart formations that indicate a temporary

consolidation in the prevailing trend, followed by a continuation of that
trend in the same direction. These patterns reflect periods of indecision
or consolidation as traders pause to reassess before continuing the
established trend. Understanding continuation patterns helps traders
identify high-probability entry points to join the trend during a
breakout from these formations.

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 Bullish continuation patterns

Bearish continuation patterns

By identifying these patterns, traders can avoid false signals of reversals

and instead capitalize on the momentum of a trend that is simply taking
a breather.

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Trendline pattern

Trendline patterns are fundamental technical analysis tools used to

identify and confirm trends, chart patterns, and potential trading
opportunities. By connecting a series of highs or lows, trendlines help
traders visualize the direction of the market, determine key support
and resistance levels, and make informed decisions about entries and
exits.

These lines help define the overall direction of the market, creating
visual boundaries for trends and consolidations.

A downtrend line is created by connecting at least two successive lower

highs (peaks) on a price chart. The more times the price touches this
line, the stronger the trendline becomes. A downtrend line indicates
that sellers are dominating and pushing prices lower. As long as the
price stays below this line, the downtrend is likely to continue.

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Traders often sell or short near the downtrend line, anticipating it will
act as resistance. A break above the trendline can signal a potential
trend reversal or bullish breakout. These sequences of trend lines or
curves are used to graphically depict price movement in a chart
pattern. The price of a financial asset will fluctuate naturally for a
variety of reasons, including human activity, which can lead to chart
patterns.

The three most prevalent chart patterns which are Change of Character
(CHOCH), Market Structure Shift (MSS), and Continuation Patterns are
explained above, these patterns help traders quickly understand the
movements of market structure and how to trade using pure price
action chart.

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Chapter Four

MARKET STRUCTURE PHASES

Market structure phases are the stages through which financial markets
cycle, driven by shifts in supply and demand dynamics, trader
psychology, and broader economic conditions. Recognizing these
phases helps traders and investors identify the prevailing trend,
anticipate potential reversals, and make more informed trading
decisions. Each phase has distinct characteristics that provide insights
into market sentiment and future price action.

Accumulation Phase

An accumulation takes place at the bottom of a trend where traders

start looking to buy which comes in as a consolidation (range). This
phase occurs after a prolonged downtrend or significant market
correction. During accumulation, large institutional investors and smart
money begin to buy assets at lower prices, accumulating positions
quietly.

Let’s take a look in the chart diagram.

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Price movement is generally sideways during an accumulation, with a
tight range and low volatility as buying pressure gradually builds.
Volume tends to be higher on up days and lower on down days,
indicating subtle buying interest.

Advancing Phase (Mark-Up)

After a breakout of the accumulation phase, it goes into an advancing

phase (an uptrend) and consists of higher highs and higher lows. It’s
marked by a significant surge in buying activity and a sharp upward

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price movement. During this phase, prices rise rapidly, often fueled by
improving market sentiment, positive news, and increasing
participation from retail investors who start to notice the trend.

During the markup phase, trend-following strategies work best. Enter

long positions on pullbacks to support levels or on breakouts, using
trendlines and moving averages as guides for entry and exit points.
Trailing stops can be used to protect profits while allowing the position
to run.

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 Distribution Phase

The distribution phase occurs at the top of a trend when the market
begins to show signs of exhaustion. During this phase, the price action
becomes choppy, with sharp up-and-down movements indicating
indecision and profit-taking by early buyers. Take a look at the diagram
below:

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Patterns such as head and shoulders, and double top patterns are
common during this phase, reflecting the market’s struggle to sustain
upward momentum. Signs of distribution, such as failure to make new
highs, declining momentum, and volume spikes on down days. Tighten
stops on long positions, consider taking profits, and watch for potential
reversal signals to enter short positions.

Declining Phase (Mark-Down)

The markdown phase is characterized by a clear downtrend, with lower

highs and lower lows as selling pressure overwhelms buying interest.
This phase follows the distribution phase and marks the start of a new
bearish cycle driven by increased selling activity. Take a look in the
image below.

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During markdown, prices decline sharply, often accelerating as fear and
panic selling take hold. Volume tends to increase on down days as
participants rush to exit positions.

Markets continuously cycle through these phases, driven by shifts in

supply and demand dynamics, market sentiment, and external factors
like economic data and geopolitical events. Recognizing these phases
can provide a strategic advantage, allowing traders to align their
positions with the dominant market forces.

Chapter Five

TYPES OF TREND

In trading and investing, understanding different types of trends is

crucial for aligning your strategy with market movements. Trends can
be categorized by their duration, and each type has distinct

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characteristics that can influence trading decisions and risk

management. Here’s a closer look at the three primary types of trends:

Types of Trends

Short-Term Trends (Intraday to Weeks): Short-term trends last from a

few minutes to several weeks and are often influenced by immediate
market news, events, technical factors, and trader sentiment. These
trends are typically observed within smaller timeframes such as 5-
minute, 15-minute, hourly, and daily charts.

Trading Strategy: Short-term traders focus on quick entries and exits,

capturing small price moves. Strategies include scalping, intraday
trading, and short-term swing trading. Risk management is crucial, with
tight stop losses to protect against rapid reversals.

Medium-Term Trends (Weeks to Months): Medium-term trends

extend from several weeks to a few months. They strike a balance
between short-term noise and long-term movements, making them
popular among swing traders and position traders who seek to
capitalize on broader price swings without the constant monitoring
required for short-term trading.

Trading Strategy: Traders focus on capturing larger price movements,

entering on pullbacks during uptrends or rallies during downtrends.

Key levels from higher timeframes are used for setting entry, stop-loss,
and profit-taking points. Common strategies include trading breakouts
from long-range consolidation patterns and using technical methods
like the smart money concepts to identify trend changes.

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Long-Term Trends (Months to Years): Long-term trends span months
to several years and are the most significant for investors and traders
looking to hold positions for extended periods. These trends are driven
primarily by broader economic cycles, monetary policies, and long-term
shifts in market sentiment.

Trading Strategy: Long-term traders and investors focus on buy-and-

hold strategies, often aligning with fundamental analysis to identify
undervalued assets with growth potential. Position trading and
investment in trends like bull markets, bear markets, or secular
movements are common.

Importance of Recognizing Trend Types

Strategic Alignment: Understanding trend duration helps align your

trading or investment strategy with the appropriate time horizon,
ensuring that entries and exits are well-timed and risk is properly
managed.

Each trend type offers unique opportunities and challenges, and

understanding their distinctions helps traders and investors make more
informed decisions, maximizing the potential for success across
different market environments. Let me know if you'd like to explore
strategies for trading these trends or specific examples!

Chapter SIX

RISK MANAGEMENT AND PSYCHOLOGICAL FACTOR

Risk management is a crucial aspect of trading and investing that

involves identifying, assessing, and mitigating potential losses to

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protect capital and enhance long-term profitability. Effective risk

management helps traders minimize the impact of adverse market
movements, maintain emotional discipline, and ensure that no single
trade or investment can significantly harm their overall financial
position. Here’s an in-depth look at risk management, including its key
components, strategies, and best practices.

Key Components of Risk Management

Position Sizing: Position sizing refers to determining the amount of

capital to allocate to a single trade or investment based on the level of
risk and market conditions. Proper position sizing ensures that losses
are manageable and that no single position can severely impact the
overall portfolio. E.g. Using the 1-2% rule, which suggests risking no
more than 1-2% of your total trading capital on any single trade. For
example, with a $10,000 account, risking 1% means limiting the
maximum loss to $100 per trade.

Stop-Loss Orders: A stop-loss order automatically closes a position at a

predetermined price level to limit losses if the market moves against
the trade. This is crucial to safeguard against large losses if a trend
unexpectedly reverses. It is possible to control risk and guard against
unfavorable price movements by placing stop-loss orders above recent
swing highs in a downtrend or below recent swing lows in an uptrend.

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Stop loss can be placed at a Swing High of the bearish structure.

Stop loss order at a Swing Low

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A Bullish position sizing diagram

A bearish Position sizing

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 Psychological Factors and Discipline

A common idea among traders is that "the trend is your friend." But it's
crucial to recognize psychological biases like fear of missing out
(FOMO).

Psychological factors and discipline are fundamental to successful

trading and investing. The financial markets are often unpredictable
and managing your emotions and maintaining discipline can be the
difference between consistent success and frequent failure. Traders
who master their psychology can better adhere to their strategies,
avoid impulsive decisions, and sustain their focus during market
volatility.

Mastering psychological factors and maintaining discipline are vital

components of successful trading. By understanding your emotional
triggers, setting clear rules, and practicing disciplined execution, you
can minimize the impact of psychological pitfalls and make more
rational, effective trading decisions. Trading is not just about strategy
but also about self-control and refining this aspect can significantly
enhance your long-term success in the markets.

CONCLUSION

Understanding market structure is a fundamental aspect of trading and

investing that provides traders with a clear framework for navigating
the complexities of financial markets. By recognizing the various phases
of market structure, identifying key elements such as trends, breakouts,
reversals, and continuation patterns, traders can better anticipate
market movements and make informed decisions.

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Market structure is not static; it evolves continuously with changing

economic conditions, investor sentiment, and market dynamics.
Therefore, traders must remain adaptable, continually refine their
skills, and stay disciplined in executing their strategies. By combining
technical understanding with robust risk management and
psychological discipline, traders can develop a comprehensive approach
that enhances their ability to navigate the markets confidently.

With the right knowledge, tools, and mindset, traders can harness
market structure to identify opportunities, mitigate risks, and achieve
consistent performance in the ever-changing landscape of financial
markets.

File by: Emmanuel Odior from Nigeria, founder of the Greyholdyngs

Forex Academy.
Contact: https://t.me/GreyHoldyngsFxA

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