Market Structure & Mechanics: How Forex Trading Works

Market structure is the language of price. Read correctly and consistently, it turns a moving chart into objective decisions: what the active trend is, where price is invalidated, and which targets are reasonable. This course section builds a repeatable checklist for swings, trends, transitions, and liquidity so you trade rules, not emotions.

Core building blocks

• Swings: Local turning points defined by a fixed pivot rule (e.g., a swing high has two lower highs on each side).
• Trends: Uptrends print HH/HL; downtrends print LH/LL. Ranges show alternating violations with no directional intent.
• Transitions: Change of Character (CHOCH) hints at a shift; a confirmed Break of Structure (BOS) validates the new direction.

Top‑down (MTF) workflow

1. HTF (D1/H4): Mark major swings, HTF levels, equal highs/lows (external liquidity), and obvious inefficiencies (FVG).
2. Mid (H1/M30): Refine zones, identify the active impulse range, map likely pullbacks (discount/premium).
3. LTF (M15/M5): Wait for a trigger inside the HTF zone (e.g., micro‑BOS), then place the stop at structural invalidation.

Learning Objectives

• Differentiate impulsive versus corrective legs with objective rules.
• Link order flow and liquidity behavior to structural highs/lows.
• Plan pullbacks into FVG/Order Blocks within the dominant HTF bias.

Core Concepts

• Impulse: Momentum leg that breaks or extends structure. Usually shows wide candles, low overlap, and leaves delivery gaps (FVG).
• Correction: Overlapping price action that seeks fair value. Often returns to prior structure, FVGs, or the origin zone.
• Rebalance: Markets tend to fill inefficiencies. Expect partial fills of FVGs or retests of the origin before the next impulse.

Execution Workflow

1. Mark the last HTF impulse range and note its origin and target (external liquidity or expansion objective).
2. Anticipate a corrective leg into discount (for longs) or premium (for shorts) relative to that range.
3. Require an LTF trigger (e.g., micro‑BOS/CHOCH) from inside a confluence zone before entry. No trigger, no trade.

Mini‑Example

H4 uptrend prints a strong bullish impulse leaving a bullish FVG. During Asia, price drifts lower (correction) into the H1 discount and taps the FVG. On M15, a micro‑BOS forms. Entry on a retrace with stop below the LTF invalidation aligns risk to structure and targets the prior external liquidity.

An uptrend forms when price prints higher highs (HH) and higher lows (HL); a downtrend forms with lower highs (LH) and lower lows (LL). Ranges occur when attempts to break either side fail or alternate, signaling balance and liquidity building. Your job is to define the current state and its invalidation, then align entries to that context.

Rules to reduce confusion

• Primary swing structure: Use a fixed pivot rule for swing highs/lows. Update only after candle close.
• Confirmation: A BOS in the trend direction confirms continuation; failure to make a HH/LL and a CHOCH warns of transition.
• Invalidation: For an uptrend, the last HL is invalidation; for a downtrend, the last LH is invalidation.

Quick checklist

1. What is the HTF trend (D1/H4)?
2. Where is price relative to the last impulse range (discount/premium)?
3. Is there an LTF trigger in a confluence zone to justify entry?

Price often rotates through recognizable phases. Understanding where you are in the cycle helps you anticipate liquidity behavior and select the right tactics.

• Accumulation: Sideways range after decline; liquidity builds below/above range. Watch for sweep and reclaim to hint at expansion.
• Manipulation: A false break (liquidity grab) through equal highs/lows to fill institutional orders before the real move.
• Expansion: Trending phase with strong impulses and shallow pullbacks; structure prints frequent BOS in the dominant direction.
• Distribution: Range after advance; trend weakens. Liquidity sets on both sides; risk of reversal increases.

Swings are the backbone of structure. A consistent definition avoids hindsight bias and keeps your invalidations objective.

Defining swings

• Swing high: A high with at least two lower highs on each side (adjust the count to your plan and keep it fixed).
• Swing low: A low with at least two higher lows on each side.
• Update rule: Only confirm swings after candle close to avoid mid‑bar relabeling.

Using swings in practice

• Bias: HH/HL sequence = bullish bias; LH/LL = bearish bias; alternating = range.
• Stops: Place stops beyond the structural invalidation (e.g., below the last HL for longs).
• Targets: External liquidity beyond prior swings or measured projections of the active impulse.

A BOS confirms trend continuation when price closes beyond a prior structural swing in the direction of the prevailing trend. It separates noise from genuine progression.

Define it precisely

• Close rule: Use a body close on your execution timeframe (e.g., M15). Wick pierces alone do not count unless your plan states otherwise.
• Location: A BOS from HTF discount (for longs) or premium (for shorts) carries more weight.
• Invalidation: The last opposite swing (HL in an uptrend, LH in a downtrend) serves as invalidation for continuation trades.

Example

In an H1 uptrend, price consolidates and then M15 closes above the prior M15 swing high (BOS). A shallow pullback forms into a small bullish FVG. Enter on retrace with stops below the micro invalidation and target the next buy‑side liquidity.

An order block (OB) is the last opposing candle before an impulsive break of structure. It highlights where significant orders likely sat and where residual interest may remain when revisited.

• Identification: Find the last bearish candle before a bullish impulsive break (bullish OB) or the last bullish candle before a bearish break (bearish OB).
• Refinement: Refine a broad HTF OB on your entry timeframe; consider using open/50%/wick extremes per your plan.
• Confluence: OB with FVG overlap, session timing, and HTF discount/premium has higher quality.
• Trigger: Wait for LTF confirmation (micro‑BOS/CHOCH) on the return into the OB. No trigger, no trade.