What is the Forex Market Structure?
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Do you know what the forex exchange structure is? Foreign Exchange Markets are markets where buyers and sellers sell and buy foreign currencies. Thus, a foreign exchange market is a marketplace where currencies of different countries are traded.
Traders have their eyes on the “Holy Grail,” the green light red light indicator every day. Finally, there’s a sign telling you how to make money 100% of the time, a shortcut, if you will. Unfortunately, many aspiring traders waste time searching for something that doesn’t exist. There is no trading unicorn. Yet, they ignore the basic principles of day trading in any market.
Having a good understanding of the market structure is essential. Knowing market structure will open up a new world regarding the financial markets. When you learn how to trade, be a master of simplicity, and riches will follow.
What is Market Structure?
Market structure, by definition, is yet the simplest form of price movement in the market and is being read about. Therefore, it is essential to support and resistance levels on the charts, swing highs, and swing lows. These are levels that are easily identified and held until they don’t.
Market structure is a trend-following tool that traders read and follow based on how an asset moves. Everything is part of the market structure, from bullish moves to bearish and in-between ranges.
Market Structure is often referred to as Price Action. We refer to this study as a market structure because it’s how the whole market moves. First, understand the trend and the anticipated moves, and then you can add other criteria to your trade qualifiers. Like volume, pivot points, moving averages, and more.
Different types of market structures
The market structure is simple and provides a basic understanding of what markets are doing. Three types of market structures make it easier to understand what markets are doing. The first is Price Action, where the market moves just based on price. Those trends are not considered.
Trading success depends on understanding when a shift occurs based on the timeframe YOU follow. The market can trend in 3 different ways at once. They are three main types of market structure which are:
- Bull trend
- Bear trend
- Sideways trend
A market trend will often follow one of the three directions above and reading whether a trend will continue or reverse relies on knowing market structure. The market tends to trend sideways most of the time. However, you can fire short bursts in either direction when you have a range.
Higher highs and higher lows characterise bullish trends. As long as the asset price prints a lower low, the trend will continue in that direction. When the trend fails to print higher highs, it shows signs of weakness.
Prices move in a downward direction when the lows and highs are lower. The bear trend will cease when a higher high comes into the price. However, if lower highs continue to print, the trend will continue to fall.
The beginning of higher lows or equal lows signifies that the trend reverses.
An equal high and low equal trend is called a sideways trend. Consolidation can last for a long time in the markets. During this period, the price trends in a range and is consolidating. In this case, the price must break out from either the top or bottom of the range. This could be yet the beginning of one of the starting two trends.
Forex market structure: directional movements
The computer monitor shows falling stock markets, stocks for virus analysis, and technical analysis for professional analysis!
There are three directions in which the Forex market moves. Directions like these represent the movement of the trend and the movement of currency value. These trends are independent of time frames so that you can find price trends at any time.
1. Uptrend or Bull trend
The Bull trend of the market structure is characterised by higher highs and lows, known as the uptrend. This can be perceived by looking at how consistently high the price moves. The higher highs come after higher lows. As the price rises, the lower price falls.
As soon as the market opens and lows form, traders will embrace risk for more profit, so when the Bull trend begins, the market will assume risk. As a result, forex currency prices rise due to this increase, and the market structure moves upward.
You can profit from both market conditions if one currency rises, like Euro, and the other is falling, like Yen. So a Forex trader following bullish trends almost always invests during periods of peak prices.
If we look at the Euro, it is evident that the currency value is higher with the upward trend. A currency in the bear trend tends to strengthen, such as the Japanese Yen. Trading Euro/Yen Forex pairs gives traders an easy way to indicate ideal positions for buying or selling.
2. Downtrend or bear trend
The downward trend, or bear trend, shows lower highs and lows and moves downwards. Therefore, if the asset’s price falls by nearly 20%, the Forex market structure shows downward under the bearish trend.
When the market price falls, traders who enter the market ensure increased profits or demand for their products. Traders benefit from a larger platform when the market structure moves downwards.
Neither the bullish nor the bearish trend has a fixed time or position when it converts. Price breaks, either way, determine when it transforms. To enter the market successfully, one must prepare for both market trends.
Using the Euro example, when the Euro moves down, the currency is most likely losing value. In other words, the right time to sell is when the Euro moves down. Therefore, as the prices fall, the selling rate goes up.
3. Sideways trend
As the price moves horizontally or consolidates, sideways trends show equal highs and lows. So, when both supply and demand are similar, the market structure follows a sideways trend.
A narrow band moves initially and is broken when the price moves upward or downward. Whether upwards or bullish or downwards or bearish, a new trend begins. High price levels also define the latest trend.
Essential elements of forex market structure
The Forex market structure is one of the most important factors to understand. In the Forex market, the price trend is an essential factor. A reversal or consolidation of upward or downward price movements determines it.
A bull trend will cause the dominant currencies such as NZD and USD to be replaced by high-risk currencies. However, as it operates across currency pairs in the Forex market, this price structure doesn’t entail higher risk, whether bullish or bearish.
2. Support and resistance levels
After reaching a specific level, these terms refer to the barriers that prevent the prices or values on the Forex charts from moving in that direction. These points mark the point where a continuous trend may halt or reverse.
On the Forex market charts, trend lines are used to determine this. A downtrend that breaks is called support, and a price move about to pause is referred to as resistance.
3. Patterns or charts
The chart or pattern depicts the price change and highlights the purchasing and selling points for identifying the best time to enter or exit the Forex market. By using these charts, traders can predict future price movements by examining the pattern of price movements.
In addition, traders can use the chart patterns to analyse an asset’s supply and demand before buying or selling in the forex market to maximise profits. Price patterns show continuous price movements and breaks in price.
It helps traders understand the market structure and deal with potential risks. If you know and use price patterns or charts correctly, you can convert your thousands into millions, just like Dan Zenger, who earned $42 million in 23 months.
Forex market structures based on timeframes
In the market structure, trends and prices are categorised by time frames, and these trends and prices are different at different times. Therefore, traders also choose different timeframes for trading on the Forex market.
For example, traders can identify intraday charts from day charts by examining the Forex market structure. A currency trend may be bullish during the day, but bearish during a time interval, perhaps 10 minutes.
This chart shows more frequent price fluctuations. It also changes the whole trend and the entire structure of the market. Despite being prone to change, the market structure still has a trend that Forex traders follow. It identifies the right time to buy and sell that makes the difference.
It is still possible for them to do so and trade the Forex market. Fortunately, it doesn’t limit Forex traders’ choice of timeframes. They can yet still do so and continue trading in the Forex market. Market structure is all that traders need to follow for the selected timeframe.
How do you read the forex market structure?
To read the Forex market structure, traders should understand the market structure’s principles, elements, and movements. The market structure only shows the patterns and movements of prices.
To predict the next new price, we should use previous price patterns. Forex chart lines showing supply and demand help traders estimate the new price by pointing out the supply and demand lines.
The traders can determine their next move by analysing before trading without wasting their time. The traders can also identify the points where there is the most demand or selling to select the item’s value at the given time.
Traders can also follow market trends or make business decisions according to price patterns using the market structure. To determine whether a trend is impulsive or corrective, traders should adequately understand its nature. We discussed these terms earlier.
Since impulsive market trends typically remain static for comparatively more extended periods, they may still move into either consolidation or reversal. Energy and gravity play a significant role in this process as well.
Compared to the corrective price pattern, the impulsive price pattern tends to be more energetic. By this process, sudden price increases in gravity when the momentum of the price falls, leading to the conversion of the fresh price movement into a corrective one.
How important is it to read a forex market structure?
It takes luck, diligence, and strategies to trade on the Forex Market. However, in times of chaos, it is essential to have the ability to opt for less risky trading opportunities. This can be accomplished by understanding the market structures, which are the backbone of all markets.
Trading on the forex market requires calculating investments, and the emotional burden can sometimes take its toll on the traders. A trader’s estimated range and strategy can be established by analysing market trends and patterns. They should also work on eliminating their pitfalls.
Moreover, the extensive knowledge about prices, sales, and demands and the low and high market risks available within the Forex market structure enables traders to find new trading opportunities if used appropriately.
Forex is, above all, a volatile market. As a result, forex markets are highly susceptible to ups and downs in terms of price or value of assets. This provides a broader picture of the changes in the Forex prices by tracking these changes through the Forex market structure.
Markets come in all shapes and sizes, having different benefits. Despite its apparent complexity, the forex market structure is worth reading. Before entering it, you should understand any market’s structure if you want to get the most out of it.
Market participants in the forex market include brokers, hedgers, and several types of traders. However, to build up a brokerage company’s high standards in the market, a good liquidity provider is essential.
Essentially, it consists of three fundamental elements: market trend, resistance and support, and price patterns. The price forms a pattern that guides traders about its movement and value, but trends move in three directions: upward, downward, and sideways.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst