What is Forex Market Structure? Is It Applicable To Crypto?
Market structure is critical in trading smart money techniques and is applicable to both the forex and crypto markets.. It refers to the framework or characteristics of how any given market currently trades. It describes the behaviour, conditions, and current flow of the market. This can be seen by a chart showing the currency pairs' prices over time.
In Forex trading or price action trading, understanding market structure can help you interpret current trends and predict their direction. It also allows traders to take advantage of opportunities by recognizing possible points where the price could reverse or continue its trend.
For example, a trader may look for a Break Of Structure (BOS), which identifies potential entry areas within an existing trend, or a Change Of Character (COCH), which may indicate a possible change in trend direction at a certain point in time.
By understanding the Crypto and Forex market structure and its patterns, traders can make informed decisions about when and where to position themselves to capitalize on profitable trades. Ultimately, this will allow traders to reduce risk and maximize profits when trading Forex or crypto markets.
Analyzing Market Structure for the Forex and Crypto Trader
Analyzing the market structure of Forex and Cryptocurrency is an essential component of trading with Smart Money Concepts. Market structure helps traders identify liquidity levels and potential reversal points and get an insight into the market's overall direction. Done manually, marking up the charts with these structures can be time-consuming and open to many mistakes.
There are three main types of market structure to be aware of:
- Up channels-Up channels form when the market is in an uptrend, creating higher highs and higher lows, while a
- Down channels- Down channels forms when the market is in a downtrend, making lower lows and lower highs.
- Range-bound markets- Range-bound markets are defined by prices getting trapped between two equal levels that form an area or box. This is an area where there is a battle between buyers and sellers..
A break of structure (BOS) occurs when a price breaks out of its previous pattern within these channels or ranges, creating new highs or lows relative to those previously established:
A change of character (CHOCH) follows as the price moves away from its previous trend in a new direction where traders can look for alternate entry points.
By understanding how different structures influence liquidity and overall price action, the structure can help you know what lies ahead for any currency or cryptocurrency pair they want to trade.
Plotting all the possible tops or bottoms and the corresponding change of characters (CHOCH) properly can be time-consuming and lead to many errors. Similar to a break of structure (BOS), it's easy for some swing lows or highs to go unnoticed and, therefore, opportunities missed.
Types of Support and Resistance in Trading Forex and Crypto
Support and resistance levels can act as barriers that limit the movements of the price of an asset. Foreign exchange traders use these levels to try and identify where the price will hit resistance before reversing again. In Forex and cryptocurrency trading, support and resistance levels can be placed in several ways, including horizontal lines, trendlines, Fibonacci levels, round numbers, and horizontal and diagonal channels.
There are mainly two types of breaking of horizontal support and resistance to consider when trading Forex or crypto:
By using these two types of smart money patterns, traders can increase their chances of success in the forex or crypto markets by understanding what the market tells them about where prices are headed.
Most SMC traders use some algorithm that plots such patterns more precisely. However, to go at it alone manually puts you at a disadvantage compared to most smart money traders.
One of the best algorithms for this is SONARLAB's Smart Money Bundle, as shown in the following example:
Understanding Break of Structure (BOS)
The Break of Structure (BOS) is a central pillar of the Smart Money Concepts (SMC) Forex Strategy, which focuses on trading by the market's structure.
This technique identifies trend retracements before they happen – allowing you to enter the market at the right time and maximize your profits. It can be applied to stocks, real estate, Crypto and Forex markets.
The BOS occurs when a break in an existing structure of support or resistance signals an upcoming retracement in a trend direction. When this happens, an alert is sent, marking that there may be a transformation from a longer-term up-trend to a short-term down-trend (or vice versa), depending on the type of break that was identified.
Using SONARLAB'S SMC Tradingview indicator, you can plot the market structures and identify areas where the BOS might be forming.
The indicator easily allows you to view a range of charts, such as those showing support and resistance levels for different time frames. It will enable you to identify potential short-term trend reversals before they happen and notify you of a possible upcoming smart money trade entry.
With SONARLAB, you can identify potential breakouts that could translate into profitable trades – or be alerted to any significant changes in market structure that may indicate a shift in trend well before it occurs.
BOS (Break of Structure) – What to Look for in the Markets
When trading in the forex or crypto markets, it is essential to have a good understanding of the market structure. The market structure comprises three main types - Support, Resistance and Consolidation - each representing a different stage in the market.
A break of Structure (BOS) is a valid trend reversal indicator identified when the current price action breaks through any established Support or Resistance line. When this occurs, it should be viewed as a signal that the market momentum is shifting direction.
Reversal signals can be seen on most charting applications – look for a breakout that surpasses prior highs/lows.
Manual technical analysis of indicators, such as volume profile and momentum, can be added to market structure analysis and play a vital role in trading successfully in the forex markets. SONARLAB'S SMC – an SMC Tradingview indicator that accurately identifies BOS points, is the best indicator to plot market structure for trading and includes volume and momentum analysis all in one bundle.
With SONARLAB, traders can quickly and easily make informed decisions, giving them an edge over other traders not using this tool.
CHOCH (Change of Character) -- Using Market Structure for Trading
Understanding and recognizing overall market structure analysis is vital in Smart Money Concept (SMC) trading, which is the practice of trading with smart money or institutional money. It involves identifying where traders manage the price action and taking advantage of price breakouts or pullbacks.
A ChoCh occurs when price action deviates from its existing trend to form a new type of movement – a trend reversal or consolidation. Often associated with a break of structure (BOS), Chochs have generally been considered a reversal pattern used by SMC traders, who look for a ChoCh to signify an opportunity to enter their desired trade direction.
For example, if the price action has been bullish for the last few hours, but then it changes direction and consolidates within a range for a few minutes, this could be considered a sign that the 'smart 'money' has taken control over the market and could be an opportunity to enter into shorts at the range top/high.
Benefits of Trading With Market Structure in a Bullish or Bearish Market
When you trade with the market structure, you can gain the upper hand and make more profitable trades. Market structure is used to identify trending behaviour and price patterns, making it an effective tool for traders looking to capitalize on their market knowledge.
Market structure gives traders a well-defined bias about where the market is heading, thus providing some insight into possible trading opportunities. By identifying critical support and resistance levels, traders can establish more accurate entry points and set realistic targets for exiting positions.
Furthermore, traders can take advantage of these signals to enter or exit positions at more profitable levels by monitoring shifts in market structure, such as a break of the system (BOS) or a change of character (CHOCH).
The best indicator to plot market structure for trading via charts is SONARLAB's set of trading indicators, which provide clear visual cues for quickly identifying support and resistance levels. SONARLABS also makes detecting BOS or CHOCH signals easier so traders can capitalize on small price movements more precisely with consistent rules.
Conclusion for Crypto and Forex Market Participants
In conclusion, understanding market structure is essential to trading both Forex and crypto. By understanding the characteristics and cycles of the market, traders can create trading strategies that capitalize on the shifts in the market.
By quickly recognizing the break of structure (BOS) and change of character (CHOCH) and combining these with other market conditions, traders can easily spot these shifts and use them to their advantage. With a proper indicator to plot the market structure, traders can reduce their risk and increase their chances of success when trading these markets.
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