Éducation

Reading Market Structure and The Two Breaks That Matter

What is an Uptrend:

Uptrend: a series of higher highs and higher lows. Each high goes above the previous high and each low is either above or equal to the previous low.

If you can spot this structure on any chart, then you can clearly say the trend is up.

The opposite is true for a downtrend.

Downtrend: a series of lower highs and lower lows. Each low breaks below the previous low and each high is either below or equal to the previous high.

How is the trend reversed?

A break of the structure of higher highs and higher lows is the main threat for an uptrend and could lead to a reversal from an uptrend to a downtrend.

Note: its not always the case.. sometimes the trend resumes to create new highs or moves in a sideways manner. Technical analysis isn't bullet-proof, its tendencies.

A market in an uptrend keeps printing higher highs and higher lows.. HH-HL-HH-HL. A downtrend does the opposite, LH-LL-LH-LL. Thats the whole foundation. Now the question is how do we know the uptrend is finished?

Stage 1 — Change of Character(ChoCh)

This the first crack. The market has been making higher lows for a while, but then price drops and breaks below the most recent HL.. usually a small one, a minor swing low inside the uptrend. That's called a Change of Character.

It tells that buyers couldn't defend that level. Something shifted. The character of the trend has changed.

What it doesn't tell you: that the trend is over. Not yet. Treat ChoCh as a warning signal, not a sell signal. If you short here you are front-running confirmation. Some traders may do short it, based on other confirmation factors or maybe a strong fundamental view of the market.

Stage 2 — Break of Structure(BOS)

This is the confirmation. After ChoCh prints, price either recovers or it keeps pushing lower. If it keeps pushing and takes out the next higher low down — the bigger, more significant swing low that sits before the one that just broke — that's your Break of Structure.

Now the uptrend is technically dead. A new downtrend is starting and you can flip your bias.

Cleaner way to think about it:

ChoCh = first HL gets broken(or first LH in a downtrend) : warning
BOS = the next structure point breaks : confirmation of bias change.

If price breaks the change of character level but can't follow through and reverses back up before reaching the BOS level, the original trend probably isn't dead yet.. that was just a deep pullback , nothing more.

Note: the difference between ChoCh and BOS has nothing to do with how aggressively price breaks the level. A weak break and a strong break of the same level are the same signal.
What matters is which level got broken. The first HL is almost always ChoCh, especially when it's a minor(secondary) swing. The second one is always BOS.

Support and Resistance

Support and resistance levels are simply those highs and lows that you draw on the chart.

For example.. the latest main higher low (not the secondary one i explained earlier) in the chart above is the most important support level in the uptrend. Why do i say the most important? Because simply if the price breaks below that higher low, the structure of higher highs and higher lows is no longer intact.

If that happens, a trader should be very careful, as the price may create a new lower high now, somewhere below the latest high and resume the move lower to create a new lower low.

Thank you for reading. If you have any questions or comments, happy to respond.

Note

Thanks for your feedback guys. I will add some examples and a new more valuable post soon.

But, an important thing here about this post: I never make a conclusion that a trend has reversed based on this method only. This is just one analysis method to start with as a foundation for your analysis (it's very basic and raw). it's never reliable as a standalone trading method. I look for other technical confirmations or a fundamental trigger that I believe supports this pattern.

Note

Here is a complete example.

Technician

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Technician