Understanding market structure: Trend reversals & price action

In this chart, we can observe how price action follows a structured pattern of trends, reversals, and breakouts. The market moves in cycles, creating bearish and bullish trends that traders can capitalize on by identifying key areas of support and resistance.

At the beginning of the chart, we see a bearish trend, characterized by lower highs (LHs) and lower lows (LLs). This structure indicates that sellers are in control, pushing the price lower with each attempt to rise. The price remains within a descending channel, offering multiple sell opportunities at resistance levels. Traders following this trend can look for short entries at each lower high.

The first major shift occurs when the price breaks above resistance, marking a potential trend reversal. This breakout signals that buyers are stepping in, disrupting the bearish pattern. Once a previous resistance level turns into support, it confirms a shift from a downtrend to an uptrend.

In the next phase, we see the emergence of a bullish trend, where the price begins forming higher highs (HHs) and higher lows (HLs). This structure confirms that buyers are now in control, pushing the market upward. The price moves within a new ascending channel, and pullbacks to support provide buy opportunities for traders looking to ride the uptrend.

Finally, another major shift occurs when the price breaks below a key support level. This break signifies a possible trend change, where buyers lose control and sellers regain momentum. Traders need to watch for confirmation before entering new positions, as this could mark the start of another downtrend.