This article is only a personal trading study note and does not constitute investment advice. Trading involves risk. Make independent judgments and take responsibility for your own decisions.

Deconstructing Market Structure, feat. a discussion of reversal structure.

Summary: Market Structure is made of trend and range. We can use a few deconstruction methods to read the current Market Structure and direction. By marking important points through higher high / low or lower high / low, we can express whether a period of time is in an uptrend or downtrend. These points are marked through swing high / low, then optimized so that only the necessary points remain for judgment. This article starts from basic marking, then walks everyone into reading Market Structure and its trend, and finally discusses how to read reversal structure.

  1. Swing High / Low marking method

We use a real example to demonstrate. As shown in Figure 1, mark a peak that is higher than both neighboring highs, or lower than both neighboring lows, to identify swing high / low.

Black-background candlestick chart marks a local highest point above price with a gold dot, identifying the swing high position

Figure 1. The gold dot is higher than neighboring highs, so it is a swing high

Black-background candlestick chart marks multiple neighboring highs and lows with gold dots, explaining how swing high and swing low are identified

Figure 2. By the same logic, we mark the other swing highs. Swing low works the same way, except we choose lows that are lower than their neighbors

  1. Higher High / Low, Lower High / Low, and Trend Confirmation

To confirm a trend, we need two sets of highs and lows. As shown in Figure 3 below, a downtrend requires two sets of lower highs and lower lows before the trend can be confirmed.

Gold line connects a series of lower highs and lower lows, showing how lower highs and lower lows form a downtrend

Figure 3. Downtrend structure

Returning to our example, after marking swing high / low, Figure 4 shows that we can quickly discover this section is a downtrend, meaning a trend structure formed by lower highs / lows.

Gold highs and lows on the candles form lower high and lower low in sequence, confirming a downtrend after swing marking

Figure 4. Lower highs / lows form, confirming the downtrend

  1. Reversal Structure

Here, we first mark each swing high / low with an extended line until it reaches a new swing high / low or a potential reversal.

We find that in this downtrend, the third swing high hits a candle, which is the blue box in Figure 5. Be careful: reversal structure is not confirmed yet. The top of this candle could still become a new lower high, meaning it may simply be a new high point inside the original downtrend. We can mark it first and keep observing.

In a downtrend, a gold swing extension line first touches a blue-box candle, showing that the original trend may be reversing but is not yet confirmed

Figure 5. In a downtrend, the swing high extension line hits a candle, creating reversal potential

Look at the blue low in the lower-right corner of Figure 6. After a new higher low forms, price begins to rebound and does not fall below the original downtrend’s gold low. Later, it adds a higher high, the blue new high in the upper-right of Figure 6, and the reversal trend is confirmed.

These three blue points, together with the gold point at the very bottom, can also become two sets of higher highs / lows, which confirms an uptrend, as shown in Figure 7.

Beside the original downtrend structure, a blue higher low and higher high extension appear, showing the reversal confirmation process after price does not break the prior low

Figure 6. Later, a higher low and higher high form, confirming the reversal trend

On the right side of the candlestick chart, blue highs and lows form two sets of higher highs and higher lows, showing the uptrend is officially confirmed after the reversal

Figure 7. Two sets of higher highs / lows confirm the uptrend

Below, we use line charts to summarize the reversal-structure discussion above.

Gold line first forms a downtrend, then breaks the prior dashed high, showing higher low and higher high reversal inside a falling structure

Figure 8. Reversal of a downtrend structure

Gold line first maintains an uptrend, then breaks below a blue support level, showing reversal from an uptrend into lower high and lower low

Figure 9. Reversal of an uptrend structure

If reversal structure is hard to remember, you can consider using the 123 rule as a memory aid. It is somewhat similar.

Afterword:

This article clearly defines a swing high / low marking method to help everyone deconstruct Market Structure. It is not perfect, but I believe this method can build chart feel for structure.

In real application, you will also run into other situations, such as too many points that can be marked, or points that cannot be marked. Think about how to mark better so the chart becomes easier for you to read.

This was Penchan’s first weekly report. If you have suggestions or encouragement, feel free to message me on IG @p3nchan. Thanks.

FAQ

Q: What is reversal structure?

Reversal structure is a structural shift from an uptrend to a downtrend, or the other way around. When price breaks a key high or low from the prior swing, it may form a reversal signal.

Q: How do you distinguish reversal structure from a fake breakout?

Reversal structure usually comes with expanding volume and a Momentum shift, while a fake breakout often lacks follow-through. Multi-timeframe analysis can improve accuracy.

Q: What foundation do you need before learning reversal structure?

You should first understand trendlines, high/low definitions, and basic candlestick patterns. With those foundations, reversal structure will be easier to understand.