The market structure which is also referred to as Price Action is enormously used in forex trading. It means how many people take benefit from the markets. Since the market is decentralized, there are no indicators and no volume. Often forex traders swing trade the market on the basis of its structure to grab the opportunity. Day trading on forex is done with market structure. Market structure is the simplest way to understand how the market moves.
If you are a forex trader, understanding the market structure will allow you to read the price charts and better understand the entry and exit zones.
There are basically three different types of market structure-
1. Upward Trend/Bullish Trend
It describes the condition where the market is rising. Here in this situation, the market has created a new high that has traded higher as compared to the previous high. This trend is generally depicted by the higher highs and higher lows. This trend will continue until a lower low is printed by the asset price. The confidence of traders and investors is high and it is expected that good results will continue to occur. The various factors that result in an uptrend market structure include a growing economy, reduced unemployment, higher GDP, etc. All these lead to a rise in FX currencies such as Australian Dollar, Canadian Dollar, euro, and other emerging market currencies.
2. Down Trend/Bearish Trend
It describes the conditions of lower highs and lower lows. This trend continues to fall until the lower highs extend. As a higher high appears in the price, this trend ends. This market scenario depicts a negative trend in the market, as the investors are selling riskier assets viz. the stocks and less liquid currencies, the currencies belonging to the emerging markets. Due to a continuous decrease in the value of the currency, this market has greater chances of loss. Here, the investors and traders are advised to sell off the riskier instruments and move to safe-haven currencies, currencies of developed nations.
3. Sideways Trend
Here, the movement of price takes place in a narrow range. It has equal numbers of highs and lows. During this point of the market, price trends in range and consolidation. This trend ends when the price breaks out either from the top or from the bottom of the range.
Significance of Understanding Market Trends
In forex trading when one currency is weakening the other one is strengthening, and is always done in pairs. Forex trading allows you to take advantage of both rising and falling markets, as it allows you to trade both ways means you can buy or sell in any currency pair. Bull and bear trends in the forex market determine which currency is stronger and which is weaker. With a thorough understanding of the market trends, you can efficiently make decisions related to risk management and you will also have an understanding of the right time to enter or exit the market.
