Market structure answers one question before any entry: where is price right now — in a trend, a correction, or a range? Without that answer, even a solid strategy will produce inconsistent results.

:::callout{type="info" title="The real reason strategies stop working"} Traders blame the strategy when results turn negative. The actual problem is context. A trend-following entry in a choppy range, or a counter-trend short in a clean uptrend, will produce losses regardless of the strategy. The structure read was wrong. :::

The Three States of the Market

Price only ever does three things: trend up, trend down, or move sideways in a range. No indicator tells you which state you are in faster than reading the highs and lows directly.

  • Uptrend: price makes higher highs and higher lows. Each correction holds above the previous low before launching to a new high.
  • Downtrend: price makes lower highs and lower lows. Each bounce fails below the previous high before dropping to a new low.
  • Range: price oscillates between a ceiling and a floor, failing to update highs or lows in either direction.
// Identify market state
IF current high > previous high AND current low > previous low:
    STATE = uptrend
ELSE IF current high < previous high AND current low < previous low:
    STATE = downtrend
ELSE IF highs and lows are roughly level:
    STATE = range (sideways)

The market never moves straight up or straight down. Every impulse is followed by a correction — a pullback or a range — then either a continuation or a reversal.

The One Line That Saves Your Account

The most critical rule in market structure: the previous low test during an uptrend. When a correction begins, there is one question — is the trend pausing or ending?

There is one criterion: whether price breaks the previous swing low or not.

// Correction vs reversal test (uptrend context)
IF correction holds ABOVE previous swing low:
    CLASSIFICATION = correction
    BIAS = bullish, hold or prepare to add
ELSE IF price closes BELOW previous swing low:
    CLASSIFICATION = possible reversal
    BIAS = neutral — drop bullish bias, observe
    IF subsequent bounce fails below previous swing high
    AND price then breaks the prior low again:
        CONFIRM = downtrend beginning

Holding above the previous low means the trend is intact. Breaking it means buyers are losing control and a reversal is possible.

:::callout{type="warning" title="Do not short a broken low immediately"} A broken low is a warning, not an entry signal. Wait for the bounce to fail below the prior swing high. Lower high + new lower low = confirmed downtrend. :::

Where Orders Are Clustered

Highs and lows are not just reference points. They are locations where orders stack up: long traders place stops below swing lows, short traders place stops above swing highs, and breakout traders sit on both sides waiting for confirmation.

Institutional participants understand this. They push price above a swing high to trigger buy stops and flush out shorts, absorb that volume as liquidity, then reverse price. This is stop hunting.

// Stop hunt recognition at swing high
IF price briefly spikes above a prior swing high
AND quickly reverses back below it (wick, no close above):
    LABEL = stop hunt / liquidity grab
    DO NOT chase the breakout
    WATCH for rejection confirmation before any entry

IF price closes a full candle body ABOVE the prior high:
    LABEL = real breakout
    WAIT for pullback entry

The wick-versus-close distinction is the filter. A candle body closing beyond the level means participants agreed. A wick that reverses means smart money grabbed liquidity and turned price.

:::stats

  • Wicks above highs without a close = stop hunt — do not chase
  • Candle body close above/below level = confirmed breakout — wait for pullback

The Three-Condition Trading Model

Structure, order location, and breakout confirmation work as one model, in sequence.

Step 1 — Determine the trend direction. Are highs and lows rising or falling? This sets your session bias. Counter-trend trades inside a clean trend are low-probability.

Step 2 — Detect the range. Mark the box top and bottom. You do not trade aggressively inside the range — you wait for direction to declare itself.

Step 3 — Confirm the breakout and enter on the pullback.

// Entry sequence from range breakout
MARK range box (top and bottom)

IF candle body closes above box top:
    WAIT for pullback to box top
    IF rejection appears: ENTER long
    TARGET = previous swing high or 1x–2x box height
    STOP LOSS = below box top

IF candle body closes below box bottom:
    WAIT for pullback to box bottom
    IF rejection appears: ENTER short
    TARGET = previous swing low or 1x–2x box height
    STOP LOSS = above box bottom

The broken box top becomes support on the pullback. Buyers who missed the breakout step in; sellers who were defending it are now trapped and covering. Both groups push price higher from the same zone.

The Four Absolute Rules

:::callout{type="tip" title="Four rules to commit to memory"}

  1. The market breathes. Every impulse is followed by a correction. Anticipate it.
  2. Check the previous low. Holds = trend intact. Breaks = change bias and observe.
  3. Targets at prior highs and lows. That is where smart money hunts liquidity.
  4. A wick is not a breakout. No candle body close = stop hunt. Wait for the close. 
// Four-rule filter before any trade
CHECK previous swing low — intact = trend alive, hold longs
BEFORE entry: candle body must close beyond the level, not just wick
SET target at nearest prior high or low — that is where liquidity sits
IF stopped out: audit the structural phase first, not the strategy

The strategy you already use does not need replacing. What it needs is this structural map running underneath it — so every entry decision happens in the right phase of the market, not against it.