Market structures are the basic concepts of the Smart Money methodology. The TradeMaster Pro Smart Money toolkit automatically detects and highlights real-time market structures in the market, allowing for immediate use and transparency.
To trade successfully with SMC, you need to understand the concept of market structure. This is the foundation and perhaps the most important part of trading. It gives us a bias against which to make our decisions. Our Smart Money Concepts indicator automatically maps this for you. In the market you will basically identify 3 main trends. Bullish (Rising, with continuous higher bottoms and tops), Bearish (Falling, with continuous lower bottoms and tops), and Sideways, where you find roughly the same tops and bottoms with minor differences.
Types of Market Structure #
The market structures allow to determine the continuation of the trend as well as the reversals of the market trend through two different structures:
- BOS = Break of structure
- When a bottom or top is violated (broken), the term BOS will be used.
- CHoCH = Change of Character
- CHoCH is similar to BOS, but indicates a possible change in trend.
- CHoCH is similar to BOS, but indicates a possible change in trend.
Change of character (CHoCH) #
A change of character (CHoCH), also sometimes referred to as a market structure change, is characterized by the price breaking a previous swing-low level during an uptrend (bullish CHoCH) or a previous swing-high level during a downtrend (bearish CHoCH), and thus signals a potential market reversal.
The difference between each type is based on the relative position of the previous swing peaks/bottoms. A leading CHoCH is characterized by the absence of previous signals of reversal, such as a failed higher high (lower high) during an uptrend or a failed lower low trough (lowe low) during a downtrend.
However, a CHoCH is preceded by an early sign of a market reversal.
Break of structure (BOS) #
A break of structure (BOS) can be thought of as the opposite of CHoCH, BOS is characterised by the price breaking a previous swing high during an uptrend (bullish BOS), so a new, higher high is formed, or a previous swing low during a downtrend (bearish BOS), so a new, lower low is formed. These structures occur after a CHoCH.
BOS do not indicate reversals, but the continuation of a trend, which is why successive BOS can often be observed in a trend.
Swing Structure #
TradeMaster Pro offers two different dimensions of market structures:
- Swing structures
- Internal structures
What is a Swing structure?
As a trader, you should always look to see which top or bottom will be liquidated next. A swing structure gives you a range to work with, where you can see which peak or trough will be liquidated next.
Swing Low (SL)
The swing low will be the bottom of the range in which you will trade within that swing structure.
Swing High (SH)
The swing high will be the top of the range in which you will trade within that swing structure.
Strong SL (Strong Low) or SH (Strong High)
Here you can determine which level is more likely to be violated, depending on whether our structure indicator shows the top or the bottom as strong. In a rising swing structure, the bottom will reasonably be the strong one and the top the weak one. We expect the bottoms to remain intact and the tops to be the weak ones that break through and set up a next higher top. For a descending swing structure, we expect the tops to be inviolable as the structure is followed by lower tops in the trend. Thus, the bottom will be the weak point as we expect it to break down by setting up a next lower bottom.
Internal Structure #
In the picture, our internal structure tool highlights the internal structure (I abbreviated as PL: I-CHoCH and I-BOS). The internal structure is different from the swing structure. The internal structure is more sensitive and faster to detect direction. As you can see, it is the structure inside the swing structure. This is why we call it the internal structure
Internal structures are made up of shorter-term swing peaks/lows, while swing structures are made up of longer-term ones.
