How To Trade Market Structure Breaks (MSBs) In Crypto

This article first appeared on Medium as is republished with the author's permission.

Market structure breaks (MSBs) are concepts often discussed in technical analysis. Recognizing and understanding these breaks can provide a strategic advantage in making informed trading decisions because they offer crypto traders key insights into potential trend reversals or continuations. This post is dedicated to discussing the fundamental side of MSBs and sharing tips on identifying and trading them effectively.

What is a Market Structure Break?

A market structure break occurs when the market transitions from one phase to another, such as from an uptrend to a downtrend, or from consolidation to a trend. So, MSB signifies a change in the prevailing trend of a financial asset. Markets generally move in three phases: uptrends, downtrends, and consolidations. During an uptrend, the market forms higher highs and higher lows, whereas in a downtrend, it forms lower highs and lower lows. Consolidation phases occur when the market moves sideways, with no clear trend direction.

A market structure break occurs when:

• An uptrend shifts to a downtrend by breaking below a higher low.
• A downtrend transitions to an uptrend by breaking above a lower high.
• A consolidation phase ends with a breakout above resistance or below support.

Identifying Market Structure Breaks

To identify market structure breaks, every trader has their own rules.

Traders often debate about whether they should use wicks and candle bodies. What's important is that every trader has a clear trend in place, which means at least four local formations of highs or lows.

So in a case of uptrend, a trader should look for: higher high — higher low — higher high — higher low. 

A downtrend features four successful lower formations: lower low — lower high — lower low — lower high.

In the consolidation phases, traders have to identify key support and resistance levels. A break above resistance or below support indicates the end of consolidation and the start of a new trend.

Trading Market Structure Breaks

Trading market structure breaks involve entering trades when there is a confirmed shift in the market trend. 

Here’s the author's approach to trading MSBs:

1. Identify The Current Trend: Determine whether the market is in an uptrend, downtrend, or consolidation phase.
2. Locate Key Levels: Identify significant higher lows in an uptrend, lower highs in a downtrend, or support and resistance levels in consolidation.
3. Wait For Confirmation: A break of these key levels should be confirmed by strong price action, such as a large candlestick, increased volume, or other technical indicators. (sometimes I front run the breakout if I see there are more than three of four tests of the level already. Another example is that price goes sideways and volume dies out, that is an indication that whoever was in charge of the trend (bulls or bears) ran out of steam)
4. Enter The Trade: Enter the trade in the direction of the new trend once the break is confirmed. My invalidation is usually if the price goes back to the consolidation channel or near the last local level. To minimize the potential damage of fake breakouts I advise to always set a stop-loss order.
5. Take Profit: Based on the time frame you are trading set realistic targets and lock in gains when you see the strength of the move drawing down.

More Tips for Trading Market Structure Breaks

• Use Multiple Timeframes: Use HTF (monthly, weekly, daily) for broader trends and lower timeframes (4h or less) for more precise entry and exit points. (Readers can trade MSBs on any timeframe but trends on 5-minute charts are not as solid as those on the daily for example.)
• Analyse Volume: A successful break is normally accompanied by an increase in volume to confirm its validity. Low-volume breaks are often red alerts for false breakouts.
• Be Patient: Wait for clear confirmations of break especially in the first tries. Traders will defend the important levels and it’s never to expect that a breakout will happen on the first try. This is why it’s also important to monitor the HTF and avoid impulsive decisions based on minor fluctuations above or below the level.

Trading market structure breaks can be a powerful strategy for identifying trend reversals and continuations. By understanding the key elements of market structure and employing a disciplined approach to trading these breaks, any trader can have a pretty good trading strategy. Always remember to confirm market structure breaks with strong price action and use risk management techniques to protect your positions.