How to Identify Trending and Ranging Markets

A good starting point for your technical analysis can be to look at the price structure, regardless of what method you’re using for analysing the markets. The price structure describes the waves in the markets, and this provides important information that can help us understand what’s been happening in the market.

What Is Price Structure?

Take a look at this chart, you’ll notice the price tends to fluctuate up and down.

‍

‍

These are oscillations in the price movements which we refer to as the 'waves' in the market. Each wave is made up of two legs:

A bullish leg is a price move from the low to the high.

‍

Whereas a bearish leg is a move from the high to the low. 

‍

The combination of these, either a bullish leg followed by a bearish leg, or a bearish leg followed by a bullish leg, creates one wave in the market.

When we have several waves, or price oscillations, we now have price structure, and we can take some insights from this.

‍

Let’s start with some of the basics that most traders follow:

If we have several waves with higher highs and higher lows, the market is in an uptrend, also known as a bullish trend.

‍

If we have several waves with lower highs and lower lows, the market is in a downtrend, also known as a bearish trend.

‍

Those are price structures with a clear directional bias; the market is generally moving in one direction or the other. But there are also times when the price doesn’t seem to be moving mainly in one direction. We can see this in the price structure when the highs and lows are mixed, and the price is generally staying within a certain price area. We would call this a sideways market.

‍

Sometimes you’ll notice with a sideways market that the main highs and lows are almost exactly in line with each other, as if there’s something at those points that’s causing the market to stay within strict boundaries. At Duomo, we specifically refer to this as a range; although other traders may use the term range to just describe sideways markets in general.

You’ll also sometimes hear traders refer to sideways markets as consolidation, accumulation, or value areas. There are some nuances for each of those terms and they do describe specific situations, but you don’t need to know about that just yet.

Typically, in normal market conditions, even a strong trend will have pullbacks. It’s not that common a trend will just be continuous candles in one direction, although it can happen.

‍

The reason price structure exists is related to how prices move in the markets. Price moves based on imbalances between volume and liquidity. So if it moves up, there’s an imbalance that favours that direction. But then it reaches a point where there’s no longer an imbalance and then perhaps the imbalance is in the other direction.

A good way to think about these movements is to imagine a shop. This isn’t a perfect analogy, but it helps you to get the right sort of perspective of why the structure matters. Imagine I’m selling a product and as I increase my price people are still buying more, so I can raise my price more. 

Then at some point the price is high enough that no one is buying anymore. I start to drop my price by giving a discount. If I drop it by 1% and people are back being interested in buying, that’s a positive sign that I’ll be able to increase my price further. It’s not taking much of a discount to get people interested again.

Whereas, if I’m going through a 2%, 5%, 8% discount and no one’s buying, and it’s not until I drop it to 10% that people come back to my shop. That’s changing the way I perceive the demand in the market. If I compare those two situations, it gives me the context I need to understand the current situation.

Again, that’s not a perfect analogy because it’s not literally what’s happening in the market. But I think it’s a good mental model to use to compare different price structures and interpret the differences in context much easier.

I'd recommend taking some time to identify different types of structure, and strategise how you might approach a trade on each type.