Technical traders often talk about optimal price structure. While we may use many different technical analysis tools in a trading strategy, price structure is considered by many proponents of the technical trading fraternity to be the most important. This is due to the fact that it is a pure form of market data from which all other indicators are mathematically derived. Since charts are graphical representations of price, here are 3 factors to look for when hunting for optimal price structure:
Facet 1 - Before looking for tradeable opportunities on a chart, consider the trend. An established trend gives us confidence and predictability that the market is behaving in a certain way, whether it’s an uptrend, downtrend or no clear trend, it can help to align our analysis with the current direction of price. Additional technical analysis tools can also be utilised to give added confirmation of where the market is likely to move next.
Facet 2 - Focus on small candles. Small candles are indicative of tightly contested battles between buyers and sellers. Entering on the break of a small candle, following a brief pull back in the prevailing trend, can place you right at the start of the next move.
Facet 3 - Look for areas of support and resistance. These “sticky” price levels capture the imagination of traders and can be suitable areas to trade breakouts or bounces off major levels. Another key aspect of support and resistance is that they can offer technically protected areas to hide stop loss orders.