What is Macro-Structure and Micro-Structure?
Macro and micro structure show the different time horizons of the market waves. Macro structure is all about the big picture. It shows the major, long-term trends and gives you an idea of where the market is generally heading. These are the big, dominant waves that define whether the market is going up, down, or just moving sideways.
Micro structure focuses on the smaller moves happening within those big waves. By looking at both, you can get a sense of the overall direction while also analysing the finer details to plan your next moves.
What Are Price Waves?
Before we can identify the structure, we need to identify the waves in the market. Each wave is made up of three parts:
- Highs (Peaks): The top of the waves.
- Lows (Troughs): The bottom of the waves.
- Legs: The segments connecting highs and lows.
These waves are then used to create the market structure. This includes bullish and bearish trends, as well as sideways markets.
Identifying these waves can feel tricky at first. With practice, though, it becomes second nature. Broadly speaking, there are two main types of waves:
- Macro Waves (Big Picture): These are the large, dominant waves that represent major market trends. These are used to identify the macro-structure.
- Micro Waves (Small Picture): These are the smaller waves within the larger waves. These are used to identify the micro-structure.
While many markets you analyse will have waves that fall within these two categories, there may also be waves which fall in-between. We just call these the medium-term waves.
Not every movement on the chart is a wave. Sometimes, fluctuations happen within a candle or across a few candles, but these don’t necessarily indicate market structure. It’s important to focus on the waves rather than minor fluctuations. However, these could be waves when looking at a lower time frame.
Choosing the Right Waves to Analyse
You’ve probably heard the story of Goldilocks and the Three Bears: one bowl of porridge was too hot, one too cold, and one was just right. We aim for the “Goldilocks Waves” the ones that are not too big or too small but perfectly balanced for analysis:
- If you find the waves are too small, they may be goldilocks waves on a lower time frame.
- If the waves are too big, they may be goldilocks waves on a higher time frame.
When you're analysing the waves, look for the ones that are just right for the time frame you’re looking at. Otherwise, you may want to change time frame for the size of the waves being analysed.
Mapping the Waves: A Hands-On Exercise
Here is an exercise to help you identify the macro and micro structure:
Colour Code Your Waves:
- Red: Long time horizon (macro-structure).
- Green: Medium time horizon
- Blue: Short time horizon (micro-structure).
Start Mapping:
- Look for clear highs and lows to define the peaks and troughs of each wave.
- Draw lines to connect each wave and identify the macro and micro-structure.
If waves are hard to distinguish or seem messy, it may be better to find clearer wave structures. Making note of challenging situations in your trading journal can also improve your ability to identify clearer patterns in the future.