Market structure is the foundation upon which every technical trading system is built. Before you learn any strategy, indicator, or method, you need to understand the three basic states a market can be in: trending up, trending down, or ranging.
An uptrend is defined by a series of higher highs and higher lows. Each time price pushes up, it reaches a new peak. Each time it pulls back, it holds above the previous low. This staircase pattern tells you buyers are in control and each pullback is being met with fresh demand.
A downtrend is the mirror image: lower highs and lower lows. Each rally fails to reach the previous peak, and each decline pushes to a new low. Sellers are in control, and every bounce is being sold into. For a trend-following system, this is just as tradeable as an uptrend — you simply trade in the other direction.
A range is when price is stuck between a ceiling of resistance and a floor of support, moving sideways without making new highs or new lows. Ranges are where trend-following systems struggle, because there's no clear directional bias. The smart move during a range is often to stand aside and wait for a breakout.
Being able to look at a chart and quickly categorise which state it's in is a surprisingly powerful skill. It tells you whether your trend-following system has an edge right now or whether you should be waiting. Many traders lose money not because their system is bad, but because they apply a trend system in ranging conditions.
Market structure is also how you identify when a trend is ending. An uptrend that starts making lower highs is showing weakness. A downtrend that starts making higher lows is showing potential reversal. These transitions are where caution is warranted — the old trend is losing steam but a new one hasn't been confirmed yet.
The Snapback Method is a trend-following system, which means market structure is central to every decision. You only trade when the structure confirms a trend. Launching 14th April — learn more at thesnapbackmethod.com.