The stock market is a vast, complex, and ever-changing entity; intra-day indicators may provide inaccurate valuations, news updates can be misleading or entirely false, and market rumors can ensnare investors. However, there is a universal truth that cannot be challenged: Price. One of the most profitable skills that can be developed is the ability to read and master market structure. Like a GPS in the middle of a dense forest, a true understanding of market structure provides a record of history, a snapshot of the current moment, and most importantly, a predictive mapping of the future.
The ability to master price action is a prerequisite whether you are a scalper of the Nifty 50, a position trader of mid-caps, or a trader of Stock Futures. At Investogainer Research, we also believe that clarity is better than complexity. Thus, we have broken down the intricate movements of the market into three concepts: Breakouts, Pullbacks, and Trend Reversals.
The Foundation: Reading the Market Rhythm
Your trades start with one core question: Who is in control?
Market structure is the interaction between buyers and sellers in a market, represented graphically. Buyers and sellers of a market behave in one of the following three ways:
- Upward Trend (Bullish Market): A market is in an upward trend when there are a series of Higher Highs (HHs) and Higher Lows (HLs) in the market. Buyers are stepping in at significantly higher prices each time.
- Downward Trend (Bearish Market): A market is in a downward trend when there are a series of Lower Lows (LLs) and Lower Highs (LHs) in the market. The market is bullish when sellers are pushing the prices down and buyers are exhausted.
- Consolidation (Sideways Market): The market is in a state of indecision and oscillates between a fixed Support and Resistance level. This is often where huge price movements (volatility) are in the process of developing.
Beginners tend to lose money by trying to sell when the market is in an upward trend, or buy when the market is in a downward trend, without a valid reason. As a SEBI registered firm, Investogainer Research encourages and motivates traders to focus and trade in the direction of the primary trend to increase trading profits.
The Adrenaline Rush: Trading Breakouts Correctly
A Breakout Trading Strategy is arguably the most popular approach for retail traders, yet, if not filtered correctly, it carries the most risk. A breakout is when the price confidently moves outside a defined support or resistance level.
Identifying High Probability Breakouts
How can you tell the difference between a legitimate breakout and a bull/bear trap?
- Volume Confirmation: A breakout with no volume is a trap. If price is breaking a resistance level, you should see a SPY large spike in trading volume. This is indicative of a move that is backed by institutional money.
- The Build-Up: The most successful breakouts tend to occur after a prolonged period of low volatility/consolidation just below the resistance level. This coiling effect, or coiling mechanism, is similar to a compressed spring waiting to break.
- Close Over the Level: Don’t take the trade just from the wick. Only after a candle, preferably on a 15 min or 1 hr time frame for intraday trades, closes decisively above or below the level should you take the trade.
For Bank Nifty traders, false breakouts happen a lot during the morning session. Your patience is your edge.
The Professional’s Edge: Mastering Pullbacks
Breakouts may be quite popular in trading, but the real money is in pullbacks. Pullbacks are defined as the short-term pauses in ongoing trending markets, or the small dips in the trends. Pullbacks allow traders to buy in at better prices, or at a discount, while also being able to maintain a tighter stop loss.
Why pullbacks work
With strong trending markets, profit takers will eventually step in, causing small drops in the price. This price drops is not a reversal, but a reprieve for the stock.
The Retest Strategy: It is commonplace for prior resistances to become new support. If a stock breaks a resistance at ₹100 and rises to ₹110, it is possible for the price to retrace to the ₹100 level where it will “test” buyers in the market.
Moving Averages: In a bull market, the 20- and 50-day moving averages serve as excellent support levels that entice traders to buy the dip.
At Investogainer Research, we have noticed the less aggressive approaches we have tailored for our Stock Drishti and Future Edge plans pullback strategies. This is in search for better risk reward ratios that chasing overextended breakouts may not provide.
Spotting the Change: Trend Reversals
Catching the top and bottom of a market cycle is exceptionally challenging, and doing so without confirmation can result in significant losses. However, spotting a Trend Reversal before most market participants can turn a loss into a huge gain.
The Change of Character (ChoCH)
Due to market uncertainty, the Change of Character (ChoCH) must be confirmed by a break in the market structure.
- Bearish to Bullish: In an uptrend (HH, HL) if the price breaks the last Higher Low and makes a Lower Low, the structure is broken. (This is one of the most significant structure breaks). The uptrend is in the process of reversing.
- Bullish to Bearish: In a downtrend if price moves up and breaks the last Lower High to close above it, it results in the sellers losing control, indicating bullish sentiment.
Double Tops and Bottoms
Classic Chart Patterns of the market like the Double Top (M pattern) and Double Bottom (W pattern) are visual representations of market failure. In these patterns, attempts to push the price make new highs, without corresponding increases in momentum. The result is RSI divergence. At these patterns, large participation sentiment is captured in the market to make these signals very powerful.
A trader’s shield will always be Risk Management. Understanding structure is not enough. For you to keep your capital, you must understand that the market is about probabilities, not certainties.
- Position Sizing. Never risk more than 1, 2% of your total capital on a single trade.
- Stop Loss Placement. Your stop loss cannot just be a number. It should be set to a level where, when hit, your trade thesis is proven wrong (this should be just below the recent Swing Low).
As Deepak Pal (Research Analyst), owner of Investogainer Research, says: “The stock market rewards awareness, patience, and discipline, not shortcuts.”
Conclusion:
The fact that you understand market structure means that you have moved from the realm of gambling, to that of trading. You will no longer be able to make arbitrary purchases, and will be able to gain a mental image of the ground where buyers and sellers are engaged in a war.
- Identify the Trend (Is it making HH/HL?).
- Wait for the Setup (Are you waiting for a Breakout or a Pullback?).
- Execute with Risk Management.
If you need SEBI registered mentorship to help manoeuvre through these turbulent markets, we are at your service. If you require accuracy in trading indices or prefer the safety of the cash segments, we are striving to equip you with the requisite tools to trade with confidence.
Interested in enhancing your trading experience? Sign up at Investogainer Research to gain access to transparent and value-added insights obtained through thorough research.
Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.
