Market Structure Definition and Classifications
Understanding the concept of market structure as well as its definition is crucial for investors and traders who rely on technical analysis. However, at some point, beginner traders may find it a bit confusing. Newbies often mistake it as a price action, which is wrong. Market structure definition is different from what price action means although both terms are closely connected.
In this article, we will define the structure of the market along with its main classifications as well as how it differs from price action.
What Is Market Structure?
Also known as the market state, the market structure showcases price action development with a given timeframe. Price always moves up or down showing a specific level of fluctuation. Along with these fluctuations, the market is forming its structure that can be overviewed on different types of price charts framed in daily, weekly, monthly, or even yearly periods.
The main mission of investors and technical traders is to follow market insights and use various indicators to overview the overall state taking into consideration three major market structure configurations:
- Rotational Markets. If the price keeps neutral, the market is rotating. As a rule, overall consolidation and reduced trading ranges appear to be the main signature of rotational markets.
- Trending Markets. They occur once the price turns too bullish or too bearish. In other words, traders are supposed to spot market overbought and oversold conditions in order to apply trend-trading strategies and modalities that help to generate significant profit. Fibonacci level pullback is one of the most used trading methodologies when it comes to trending markets.
- Reversal Markets. They depict markets with price action making a reversal. It is a perfect trading environment for those who prefer momentum trading with the use of chart patterns and momentum oscillators that help to identify potential reversals.
As a rule, traders utilize a set of various tools and indicators that make it possible to identify the classification of the market structure and choose a proper strategy. Ascertaining the financial situation is the first and the most important step before entering the market with a buy or sell position.
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How Price Action Is Connected with Market Structure?
Market structure classifications totally depend on the way price acts. In other words, price action is the basis or fundamental issue that affects the market structure. It describes the product’s fluctuation within a specific timeframe. Besides, it shows how the value of a traded security has changed.
Apart from being a fundamental component of market structure, price action also comes as the technical analysis basis making it possible for traders to explore how the price behaved in the past and how it is going to act in the nearest future.
The best and most reliable way to see all variations of price movement and actions is to have them plotted on the price chart. Different chart patterns are the essential part of technical analysis. You might have already seen some of the most popular types including Japanese candlestick patterns and some more. They all work with the aim of helping traders to realize how the price action can develop or change in real-time. Three major states of price action are to be considered:
- Bearish – it represents a downward price move along with sellers exceeding buyers.
- Bullish – it shows the price moving upwards along with buyers who outnumber sellers.
- Neutral – the price movement can be described as a horizontal line on the chart. It shows that the number of sellers and buyers in the market is equal.
The Bottom Line
The one thing you need to keep in mind is the fact that price action is influenced by the product flow. Price can mow up or down exceeding the supply and demand or it can move neutrally for some time. No matter what happens, price action is the main thing that affects the market structure, which is actually the result of price moving in a specific direction.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.