Structural analysis, the trader's best tool.
Have you also seen those charts where an analyst places lines and levels and, amazingly, the price respects them? It's not magic or luck. It's structural analysis and below I'm going to give you a guide (for beginners) so that you can also analyze the market in this way.
Why structures?
The first thing we need to know is that the prices of large assets, whether it is the top 30 cryptocurrencies or stocks, move following rules and patterns.
The larger the asset, the more likely it is to follow the guidelines we are about to look at.
Cycles: Every asset moves cyclically, it has an upward cycle and a downward or correction cycle. Therefore, we must identify which one we are in and also, what part of the cycle, whether it is at the beginning, middle or end.
Waves: In each time frame the market moves following a wave pattern, we usually work with 5 impulse waves and 3 corrective waves. These are known as Elliot waves, although there are many variations of waves. The basic thing is to understand this concept, you will see why.
Since the market is fractal, these waves are visible in all time frames, from small to large. The same wave cycle that occurs in 5-15 minute time frames is contained within the larger waves.
However, and this is key, WE MUST OBEY THE BIGGER TREND. Our analysis must start from a daily time frame, continue on 4 hours and so on. This is because, in a small time frame we could see a correction cycle, giving us a bearish bias, but this correction may be just a slight drop in the daily macro.
How to identify movements?
Waves occur in all temporalities, as we have already mentioned. That is why we must look at the larger temporality.
They are not always so accurate, some waves can be deformed and adopt confusing patterns.
The simplest and clearest way is to identify highs and lows. If we are in an uptrend, the highs are getting higher and the lows do not break through the previous levels. We see a "ladder".
The same goes in reverse: higher and more pronounced lows, with increasingly lower rebounds.
To use the levels, we must sharpen our eye and detect important points of support and resistance.
To do this we have several paths.
Analyze the entire history, looking for and marking where the price had difficulty rising (a resistance) and where it found support and stopped falling.
Previous highs and lows: When we identify the waves and detect the trend, we obtain a lot of information. If it is an uptrend, we can look at the previous impulse (Wave 1 for example) where the price tried to fall and rose, leaving a "wick" or area of ââinterest. That will be a support point to join wave 3, after it corrects.
Fibonacci Retracement: My particular favorite and the one I use.
This is a tool available on any chart, which draws a series of mathematically calculated levels where the price should react.
Let's take an example:
We have identified that wave 1 has ended. We already know where it started and where it ended, now it is time to project the extension of wave 2. To do this, we draw a Fibonacci from the beginning to its maximum. The most used levels are 0.5 and 0.618.
Below is an illustration of its use, taking $BTC in 1D temporality.
If you pay attention, once the impulse phase at 74,000 was completed, the price began a correction process, interacting with each level:
The first drop "hit" 0.38 where it briefly stopped, but only at the 0.5 level did it find liquidity to bounce back. So on with each level, until it even broke through the origin of the impulse.
Now pay attention: in whatever time frame you use it, you must take it as a guide, a sort of potential map.
To know that a level is "valid" you must wait for the candle of the chosen time frame to close. Touches are useless, because they leave open the possibility of a return to the zone, until it manages to close there. Look at the previous wicks, where they hit and what happens next, the price drops strongly to close in that zone.
Japanese candlestick patterns are not very reliable, as a hammer could indicate the end of the rise. But if it occurs on a level that we have already detected, it can indicate its continuation. It is up to you to know how to interpret what you see, combining knowledge.
The structure strategy is compatible with other indicators, such as the RSI or the MacD. Even with the detection of divergences.
Breaks:
A structure breakout occurs when a movement invalidates the trend. For example, if BTC were to rise above 65K right now, it would invalidate the corrective trend and change its character to "potentially bullish."
The same thing happens in the opposite direction: when a minimum is greater than the previous one, the character changes to bearish. It becomes a descending staircase.
In both cases we must wait for confirmation in the next move. If there was a new high, it must be accompanied by a correction higher than the previous low, otherwise it was just a market trap.
From support to resistance:
When trends reverse, levels usually do too.
Those levels that served as rebound zones, once broken, become resistance zones.
That's why our "map" is useful in both senses, as long as the STRUCTURE does not change.
Conclusions:
This is a basic guide, a starting point for learning. Structural analysis can be much more complex but as a first step, this is more than enough.
My advice is to practice looking back. Look at past movements, identify the waves, draw levels and see how the price behaves on them.
Back test, try until you understand, practice until you master it. Don't just go out and trade without practicing.
If you adopt this strategy, you have to master it thoroughly. Don't switch from one to the other without going deeper.
As always, the market is risky, use the tools at your disposal to mitigate those risks.
I thank you for making it to the end. This article took me a lot of time and effort, making it easy to understand but without taking away valuable content. So your support is greatly appreciated, whether it be with your like or sharing, thank you.
Those who can contribute are welcome to do so in the comments, with respect. Knowledge is best shared.
Crypto Citizen says goodbye!
