Market structure
Market structure is the pattern of swing highs and swing lows that price leaves on a chart. It is the simplest way to define a trend without an indicator:
- an uptrend makes higher highs and higher lows;
- a downtrend makes lower highs and lower lows;
- a range makes neither.
Breaks of structure and changes of character
- A break of structure (BOS) is a close beyond the last swing point in the direction of the trend, for example a new higher high in an uptrend. It confirms that the trend continues.
- A change of character (CHoCH) is the first break against the trend, for example a close below the last higher low in an uptrend. It is an early sign that the trend may be turning.
Why swing points must be confirmed
A swing high is only known once price has turned away from it. A chart drawn after the fact shows every swing perfectly, but a trader in the moment did not have them yet. Rules that use swings before they were confirmed look excellent in a backtest and fail live.
On Algonney
The market structure detector reports breaks of structure and changes of character from confirmed swing highs and lows, and the swing trend detector reports whether swings are rising or falling. A strategy sees each swing only from the candle where it was confirmed, so a backtest uses the information a live bot would have had. Market structure is often combined with order blocks, fair value gaps and liquidity sweeps in one sequence.
Related: order block, fair value gap and Technical analysis.