Market Structure: Swings, Trends, Ranges and Breaks

What you will learn

• A precise, repeatable definition of a swing high and a swing low.
• How to label an uptrend, a downtrend and a range from swing points.
• What a break of structure is and how to confirm it with a candle close.
• Why you must decide your definitions before you look at a chart.

Explanation

In the beginner course you saw trends as "higher highs and higher lows". Here we make that idea exact, so two people with the same rules mark the same points.

Swing points

A swing high is a candle whose high is higher than the highs of a fixed number of candles on each side. A common rule uses 2 candles on each side. A swing low is the mirror image: a low lower than the lows of 2 candles on each side. A swing point is only confirmed after those right-side candles have closed. Until then it is only a possible swing.

Trend and range

• Uptrend: each new swing high is above the previous swing high (HH, higher high) and each new swing low is above the previous swing low (HL, higher low).
• Downtrend: lower highs (LH) and lower lows (LL).
• Range: swing highs and swing lows stay inside a horizontal band, without a clear sequence of HH/HL or LH/LL.

Break of structure

A break of structure (BOS) happens when price closes beyond an important swing point. In an uptrend, a close above the last swing high continues the trend. A close below the last higher low is the first warning that the uptrend may be ending. Some traders call this first opposite break a "change of character". A wick through a level without a close beyond it is not a break under this rule.

Worked example

Hypothetical example: a share in $. Swing points use the 2-candle rule. Confirmation needs a daily close.

Size of the first pullback: from $110 to $104 is $6. The previous move was $110 − $100 = $10. So the pullback retraced $6 ÷ $10 = 60% of the move.

Now price falls and one candle's wick touches $107.50, but it closes at $108.40. No break: the close is above $108. The next day closes at $107.20, below the last higher low of $108. This is a bearish break of structure. The uptrend is no longer intact under our rules. It does not mean a downtrend has started; that needs a lower high and a lower low.

Common mistake

Practice activity

On paper, label these hypothetical swing points in order: low €50, high €56, low €53, high €55, low €51. Is this an uptrend, downtrend or range? Was the last higher low broken?

Key takeaways

• Define swing points with a fixed rule and wait for confirmation.
• Trend is a sequence of swing points; a range has no clear sequence.
• A break of structure needs a close beyond the swing point, not only a wick.
• The first opposite break warns that a trend is weakening; it does not prove a new trend.

Next step

In the next lesson you will combine structure on several timeframes so that your bias and your entry do not contradict each other.