Any Forex trader like you needs to understand how the market structure is related to bias. Knowing the relationship between these two allows you to make more informed decisions regardless of whether you are a seasoned or a beginner trader. Many factors in play go beyond our traditional understanding of supply and demand. Thus, to make a profit you must be aware of your own bias and how the market structure moves.
What Is Market Structure?
Think of market structure as a framework, or a foundation of a market where the trading happens. This structure will help you understand the market flow, its behavior, the levels of support and resistance, and high and low swings. With all of these factors in play, you can decide which point to enter and exit in your trades. In addition, making yourself knowledgeable of the market movement helps you mitigate risk.
There are several types of market structure: the bullish structure, the bearish structure, and the sideways structure.
Bullish Structure
In this uptrend structure, you can buy at support levels. The trend is made up of higher highs (HH) and higher lows (HL). This series will continue not until the price reaches a lower low (LL).
Bearish Structure
In this downtrend structure, you can sell at resistance levels and buy at support levels. This bearish trend is characterized by a series of lower lows (LL) and lower highs (LL). This trend will be over once the price reaches a higher high (HH).
Sideways Structure
Simply described as the price reaching equal highs (EH) and equal lows (EL).
Candlestick Pattern
Another way of understanding the market structure is by candlestick pattern. If you are going to look at the market structure based on a candlestick pattern, you can identify a price continuation or a price failure. The candlestick pattern will show if the market continues to buy or if the market started selling off. It is essential to be able to read and analyze the information these candlestick patterns are giving off.
Support and Resistance in Market Structure
Support and Resistance levels can also affect the movement of the stock price. Imagine that the price for stock ABC is falling because there is more supply than demand. The price will continue its downtrend until the demand starts to rise and eventually matches up with the supply. This is where support is at. With support, the price drop is halted as the demand or buy order increases over the supply.
Resistance is the opposite of support. It pertains to the sell orders which are in huge volume preventing the price from further increase. The uptrend is due to prices going up as the demand increases. But with resistance in play, traders will start selling off their stocks. The reasons for the sell-off could be due to traders already reaching their target price and several other reasons.
What Is Bias?
Bias refers to your market’s view based on your analysis of the market structure and other factors. Let’s say you bought a stock regardless of its price movement. This is because of your personal bias, a preconceived idea that it will go up no matter what. Your bias could be bullish or bearish or even sideways depending on your perspective. Bullish bias if you see that the trend will rise or bearish bias if you see that the price will fall.
Your ‘confirmation bias’ comes into play once you’ve started looking for evidence to justify your trading decision. Another form of bias is the ‘sunk cost bias.’ The danger with this is the continuous investment in something that has already failed or still failing. Think of losing money from a stock that wasn’t performing the way you wanted it to. But because you have invested so much money into it already, you just continue putting in more. You still believe that it will eventually work your way. In this case, your bias is investing in something even though you are already losing.
In some cases, even seasoned traders fall short because of their biases. Do not make the mistake of becoming overconfident. To help you out in avoiding this bias, you need to set a trading rule for yourself. Do not rely on your emotions and make sure to follow these rules that you’ve set for yourself. You have to stay disciplined.
How to Do Market Structure and Bias Work Together?
Based on the market structure which could include how you read the candlestick patterns, the price and resistance level, and your bias, you can now decide when to enter into trade, or when to sell off your position. With this, you can set expectations for yourself and manage the amount of money you’re willing to risk.
Knowing the market structure and combining it with your bias may not guarantee a profit. Remember that in trading, despite applying your knowledge to your technical analysis, you could still lose money. But, understanding how these two are related enables you to make informed decisions and gives you some leverage. Trading is not about relying on luck or gut feeling. It is about understanding how the market moves and applying your strategy for success.
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