Market structure: swings, HH/HL, BOS and CHoCH

Why structure matters

In the trend lesson we saw trends "by eye": price is generally heading up or down. The problem is that the eye deceives. After one big red day the trend "feels" over; after three green days we think "a new trend has started". Market structure turns that impression into a rule: we mark the turning points on the chart and read the trend from their sequence.

Why does it work? Every peak is a place where buyers ran out of steam and sellers took over. Every trough is the opposite. If each new low is above the previous one, sellers can no longer push price even back to the old level: buyers are willing to pay more instead of waiting for a cheaper price. Structure is the simplest footprint of the balance between supply and demand.

Step 1: define a swing point properly

Everything starts with the swing point. If you call every small wiggle a peak, the chart fills with noise. So you need a precise rule:

• Swing high — a candle whose high is above the highs of at least 2 candles on each side.
• Swing low — a candle whose low is below the lows of at least 2 candles on each side.

This definition is sometimes called a "fractal". Two candles is the most common choice; on the daily chart some traders use three. What matters is choosing one rule and sticking to it. More: swing point.

Look at the chart. The peak at $104.6 is a swing high: the two candles on each side have lower highs. The trough at $100.2 is a swing low. But the small peak at $103.9 is not a swing: the first candle after it is lower, yet the second ($105.0) takes it out. Then $106.6 is a new swing high above $104.6 — an HH. The trough at $102.9 is above $100.2 — an HL.

One more important point: a swing is confirmed only after the candles to its right have closed. With a 2-candle rule you learn about a swing high at least 2 candles late. That is not a flaw — it is the price you pay for filtering noise.

Step 2: HH, HL, LH, LL

Once the swings are marked, compare each one with the previous swing of the same kind:

• HH (higher high) — a peak above the previous swing high.
• HL (higher low) — a trough above the previous swing low.
• LH (lower high) — a peak below the previous one.
• LL (lower low) — a trough below the previous one.

An HH + HL sequence is an uptrend. LH + LL is a downtrend. Peaks and troughs at roughly the same levels make a range. A mixed signal (say an HH but also an LL) means unclear structure — which is information too: be careful.

Step 3: BOS and CHoCH

BOS — the trend continues

A BOS (break of structure) is when price closes beyond the last swing in the direction of the trend: above the last swing high in an uptrend, below the last swing low in a downtrend. Every BOS says "the trend is still alive".