Module 2: Understanding Market Structure

Market structure is the foundation of all trading decisions. Before using any indicator or pattern, you must determine the direction of the prevailing trend.[^8]

Defining Trends

An uptrend is defined by a series of higher highs (HH) and higher lows (HL)—each peak is higher than the last, and each trough is higher than the previous one. A downtrend is the opposite: a series of lower lows (LL) and lower highs (LH).[^9][^10]

Key Rule: Validating Swing Points

A swing low is only "valid" if price subsequently breaks the previous swing high. A swing high is only "valid" if price subsequently breaks the previous swing low. This prevents false identification of trend changes.[^11]

How Trends Change (Break of Structure)

A trend changes when:

• In an uptrend: Price breaks below the most recent higher low, creating a lower low. This is a "break of structure" (BOS) to the downside.
• In a downtrend: Price breaks above the most recent lower high, creating a higher high. This is a BOS to the upside.

Trading with Market Structure

The cardinal rule: only trade in the direction of the prevailing trend. In an uptrend, look exclusively for long (buy) setups. In a downtrend, look exclusively for short (sell) setups. Counter-trend trades have significantly lower probability and should be avoided by beginners.[^10][^12]

Ranging/Consolidation Markets

When price is moving sideways—making roughly equal highs and equal lows—the market is consolidating. During consolidation, price is trapped between support and resistance. Many traders choose to avoid trading during consolidation and wait for a breakout that establishes a new trend.[^8]