We use charts to summarize and organize market data, providing clues about supply and demand. However, you need to develop the ability to read market structure on charts. While chart reading is a very important skill, there is no single “right” way to draw charts (you can use candles, bars, volume-bars, point & figure, etc.), nor is there one “right” way to read charts. That said, the following is a good approach to reading market structure on candles/bars. In this approach, there are two key elements of market structure: pivot points and swings.

Pivot points

Pivot points show the extremum values beyond which buyers or sellers were unable to move the price. That’s the core, the very basic unit of market structure regardless the time frame of your chart.

First-order pivots.

If the candle has a higher high than the prior candle plus the candle that comes after it – that high is a pivot high. If the candle has a lower low relative to the preceding and the following candles – that low is a pivot low. It’s also possible for a single candle to have both a pivot high and a pivot low.

Second-order pivots.

Second-order pivot high is first-order pivot high that is surrounded by lower first-order pivot highs. And this is inverted for second-order pivot lows. Second-order pivots highlight more significant structure. The following chart has second-order pivots built by algorithm which includes several assumptions, so there are a few extra second-order pivots (it’s not that these algo assumptions makes the approach worse or better – just some points are better than others), try to find them.

This concept can be extended, but in actual practice you will use third-order pivots as major inflection points to watch the swings.

You can ask why do I need to build that second or third order pivot points – just switch to the higher time frame and you see the market structure without noise. Well, when you switch to higher time frame you immediately face detail losses – you can’t say how the candle was formed:

So go through bunch of charts and train your eye to find these pivot points. You can print charts and draw them with a pencil.

Swings

Swings are lines which connect pivot points and highlight the market structure for us. You connect pivot high to pivot low to pivot high and there will be cases with no alternation, so you can take the lowest low or the highest high between the dots or just take the lowest/highest dot in the series. The point is to highlight important market structure, and if you need to bend the rules – do it if common sense tells you that. Once again, it may be complicated at the beginning, but when you draw a market structure on one hundred charts you will develop this skill, and chart reading skill is very important so take your time and practice. On the following chart you may see swings connecting second-order pivot points.

After swings are outlined you can read the cues what market structure tells about supply and demand pressure. The core concepts:

• When upswings are longer in time and price than downswings, buyers are in control
• When downswings are longer then upswings, sellers are stronger than buyers
• Support and resistance are areas beyond which pivot points could not penetrate
• When there is no clear pattern, there is no imbalance in supply and demand

That’s pretty much it, from these simple concepts a lot of patterns were born, many traders try to catalog infinite variations, but that’s a waste of time – understand the roots. You don’t need to memorize hundreds of variations of pennants, flags, wedges, cup and handle, head and shoulders patterns. Also all those popular names are traded depending on the context they are met, and if you know how to read the market structure, you come up with same conclusions as traders using pattern approach. And for now just understand that there are fundamental structures: trends, ranges, and transitions from one state to another.

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