SMC Trading Part 4 - The role of structure in trading

10 April 2023, 07:49
Jing Bo Wu
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II. Fundamental Knowledge

  • Structural foundation: 
    • Estimating direction based on structure 
    • No matter how varied the form, structure breaks it all 
    • The role of structure in trading
  • Supply and demand foundation: 
    • Supply and demand trading strategy based on structure


The role of structure in trading  

There is nothing new under the sun

Some people may see the reversal structure and say it's just a neckline breakout, and ask what's so special about it. Actually, it's not like that. The market is complex and fractal, making it difficult to read directly. But by deconstructing it into its most basic structures, we create the foundation for reading the market.

Why do we keep emphasizing structure?

 Because understanding market structure is the key to using any trading strategy! Without understanding market structure, it is difficult to understand market direction.

Many beginners often talk about "trend and momentum," but may not necessarily understand what they mean.

What is momentum? Momentum is the current overall direction of the market. Using a trading strategy is like firing a gun or a cannon; you have to aim before you can fire. Structure is the aiming device for finding direction, and can bring traders a higher probability of expectation.

The market navigator for a complex market - multi-timeframe structural analysis

To analyze the market, we must start from the top and work our way down, from macro to micro. Reading market structure is a holistic analytical behavior that can maximize our ability to avoid information overload. However, directly reading candlestick charts is like trying to see an elephant in a tube or groping for it like a blind man.

The rise and fall trend of the market on the daily or higher timeframes can tell us the overall direction of the trend, whether it is up, down or sideways.

A pullback on the daily chart may look like a trend reversal on a smaller timeframe. The sudden reversal of price on a smaller timeframe may be the end of a pullback on a higher timeframe. This kind of structure conversion can easily cause confusion and disorientation on a single timeframe, which is why multi-timeframe analysis is crucial.

The structure can affect trading strategies in the following ways

Firstly, by establishing expectations for the main direction based on the structure of the larger timeframes. Then, determine whether the current price is in a breakthrough stage or a pullback stage, in order to decide whether to trade counter-trend for short-term swing trades, or to trade with the trend for long-term trend trades.

The "position" in the " momentum-position-state " refers to the decision-making position, not just the key support and resistance levels.

how to use the structure to enter the market

The "state" in the " momentum-position-state ", or the candlestick combinations, is only meaningful when in the decision-making position.

the decision-making position is where? 

two types of reversal structures experience a pullback, and where the candlestick combinations must show a strong reversal momentum.

What candlestick combinations represent reversal?

Engulfing, Hammer/Shooting Star, Evening Star/Morning Star, and Harami. These combinations are enough to understand from the book "Japanese Candlestick Charting Techniques."

Thoughts:

The fractal market is very interesting. The reversal candlestick combinations of larger timeframes are the reversal structures on smaller timeframes, and vice versa. However, why do reversal structures sometimes fail?