Price action: how to read market structure

Price action is the skill of reading a chart from price itself: the candles, the highs, the lows, the speed of each move. No moving averages or oscillators, or only as a supplement. Every indicator is calculated from price; price action goes straight to the source. Its core tool is market structure.

HH, HL, LH, LL: the alphabet of structure

Traders everywhere use four abbreviations. An HH (higher high) is a high above the previous high. An HL (higher low) is a low above the previous low. An LH (lower high) is a high below the previous high. An LL (lower low) is a low below the previous low.

An uptrend is a sequence of HHs and HLs. Buyers keep pushing price higher, and on every pullback they step in sooner. As long as that sequence continues, the trend is intact, even if some pullbacks look scary.

A downtrend is the mirror image: LHs and LLs. When neither sequence shows up, and highs and lows sit at roughly the same levels, the market is in a range. Working out which of these three states you're in is the first decision of every analysis.

Change of structure

A trend rarely ends all at once. In an uptrend, the first warning is a high that fails to clear the previous one: an LH appears. But as long as the last HL holds, the bullish structure isn't broken. The change of structure is confirmed when price closes below that last HL. At that point you have an LH followed by an LL: the bearish sequence has begun.

1. The uptrend prints HHs and HLs.
2. A new high fails below the previous one: first LH, just a warning.
3. Price closes below the last HL: the bullish structure is broken.
4. The next bounce fails below the LH: the downtrend is in place, look for shorts.

This reading also gives you logical stops. In an uptrend, your long stop goes below the last HL: if that low breaks, your trend idea is wrong. In a downtrend, above the last LH. It's a way of letting the structure make the call for you.

Supply and demand zones

When price leaves a zone violently, in a few long candles, it means there was a strong imbalance there: far more buyers than sellers, or the other way round. Some of those orders may not have been filled. The launch zone becomes a demand zone (below price, where it took off upwards) or a supply zone (above price, where it dropped away).

• Marking it out: take the last candle or candles before the sharp move, from the low of their wicks to the top of their bodies (for a demand zone).
• Strength of the move: the faster and longer the move away from the zone, the stronger it's considered.
• Freshness: a zone that has never been retested often reacts more. Each new test uses up some of the orders sitting there.
• Context: a demand zone in an uptrend is more interesting than a demand zone against the trend.

The pin bar at a zone

A pin bar is a candle with a small body and a very long wick, at least twice the size of the body. At the bottom of a move, it belongs to the hammer family: price was pushed down, then buyers brought it back near the open. On its own, in the middle of nowhere, it doesn't mean much. At a demand zone, on an HL in an uptrend, it becomes an interesting signal.

That's the core idea of price action: confluence. A bullish structure, a demand zone and a rejection candle all pointing the same way. Each element on its own is weak. Together, they improve the odds, without ever making them certain.