Day Trading 101: Market Structure Analysis

by Josh Biggs in Tips on 11th January 2021

Part of day trading, or any investment style for that matter, is understanding the financial market. Even with some basic knowledge of the markets, you can make more educated decisions that help you succeed as an investor. Not taking the time to learn can cost you considerably in the end. Your first step in education is finding a regulated broker to help (here is a list of regulated South African brokers).

Market structure analysis is an essential part of day trading. It allows you to make sense of the market, how it moves and how to capitalize on that movement. However, it takes some time and practice to fully understand market structure analysis before using it to your advantage.

Ready to further your knowledge in day trading? We created a beginner guide to understanding market structure analysis.

What Is Market Structure Analysis?

First, let’s define what market structure analysis is. At its basic, market structure analysis is analysing the characteristics of the market. You’re looking at what influences the pricing of the market and what direction the market moves. For this analysis, you’ll rely heavily on charts to gather information.

Types of Market Structure

Market structure comes in three trends: bull, bear and sideways trends. It’s essential to fully understand the three trends before you can make informed decisions on your trades.

The bull trend is often looked at as a positive. When the market is in bull territory, that means the stock value is increasing. This reflects a strong economy. The market remains in a bull trend as long as there are higher highs and higher lows.

The bear trend is the opposite – prices are falling. A bearish market typically means the economy isn’t performing very well, reflecting in the lower stock value. Lower lows and lower highs indicate a bear market.

Lastly, the sideways trend is when the market is equal. The highs and lows remain similar, and the market is considered to be in consolidation. The market remains in this territory until the price starts to increase or decrease.

Importance of Market Structure Analysis

So, why is market structure analysis important to you as a day trader? Because we’ve noted that understanding how the market works and the direction of the price is essential to success, this analysis allows you to answer that question – what trend is the market in today?

When you know the trend, you can either buy or short a stock. If a stock is on the rise, you’d want to buy in as early as possible and ride the upward trend, and vice versa for shorting it. Your analysis of the market and the factors influencing it will help you decide which direction the price is likely to go. Knowing this is a crucial step to success.

Market structure analysis is only one part of a solid investment strategy. Once you create a plan that uses multiple techniques to make informed decisions, you’ll have enough information to get you on the path to success.

Find yourself a broker and platform that aligns with your goals and strategies. Use this top regulated brokers list to find the perfect fit for you.

Categories: Tips