Path of least resistance keeps traders on track

Dear Traders,

Seeing price turn at unexpected points can create stress and confusion.

I'm sure that you've encountered these awkward trading moments where the price took you by surprise…

…or that you felt lost in a sea of analysis and struggled to find a setup.

Today's article will explain how traders can benefit from understanding the market structure.

As a bonus, I'll show you why and how the price chooses the path of least resistance.

Once I've learned the logic behind this path, my trading became calmer and wiser.

I hope it will have the same effect on you.

Market structure explained

Firstly, I've got some good news and some bad news.

Let's start with the bad news:

…there is a vast number of inputs impacting the movement of price at any given point in time.

The good news is, we can simplify our understanding of price movement by using these three concepts:

1. trend and momentum – analysing trends, momentum moves, corrections and ranges
2. S&R – support and resistance (S&R) levels
3. patterns – finding various patterns like candlestick and chart patterns.

These three methods alone proved to be really helpful in making me understand the market structure.

To gain more perspective on using the market structure, you can take a look at the video below after you've read the article.

Price follows the path of least resistance

In many regards, the market is very similar to a river.

When water flows down the hill towards a lake or sea, it also chooses the path of least resistance.

Think of how a river goes around the large rocks when its stream is weak.

On the other hand, when the stream is strong, the path of least resistance lies over the rocks or even through them.

In my opinion, price movement works the same way as that river:

…price movement is like water...

…and support and resistance levels are like large rocks.

Remember this metaphor next time you're analysing potential price movements.

So, the path of least resistance is most likely for price to bounce at the S&R when either:

1. support and resistance (S&R) is strong and the trend or momentum is weak; or
2. the market is correcting and ranging.

But when the momentum or trend is stronger than the S&R in front of it, the path of least resistance is for price to break through.

To recap, price tends to choose the easiest path, which is the path of least resistance.

Patterns

One part of the market structure we haven't discussed yet is patterns.

Patterns can help you understand more about the market psychology of the moment.

They also add valuable insight on whether the trend and momentum are stronger/weaker than the support and resistance:

1. divergence patterns indicate potential trend reversal
2. continuation chart patterns most likely indicate that momentum is strong
3. candlestick patterns indicate whether price is bouncing or breaking support and resistance.

Using the market structure

Please don't get me wrong, I'm not claiming that I know when and how the price will move...

…since nobody can know that for sure.

My main point is that the market structure can help you understand the likelihood of price movements.

By combining patterns, support & resistance and comparing it with trend, range and momentum, I'm able to establish the most likely path of least resistance.

I use this path as my road map for tackling the market.

How?

I analyse the charts and look for parts of the road map that seem interesting to trade.

I use the following steps as a guideline:

1. set up invalidation levels – price levels that invalidate my current road map of the path of least resistance
2. set up confirmation levels (I call them "decision zones") – price levels where I expect a significant decision within my road map of the path of least resistance
3. wait for triggers at decision zone – signals which confirm that price is reacting to the decision zone.

Step 3 is critical, because I must see that the market and price movement confirm my analysis and market bias.

I want to avoid the situation where I am left hoping for the market to confirm my view.

Waiting for triggers to appear at the decision zones removes my bias (at least partly).

It also provides a signal that the price is reacting to my area of interest and not just passing it.

Above all, I always try to approach trading as a dance, with the market leading and the trader following.

If you are interested in this concept and would like to know more about it, I encourage you to join our live trading webinars.

Every Tuesday and Wednesday morning (GMT time), we discuss and analyse current market situations.

Final thoughts

Thanks for joining me today.

I hope this article helped to give you some new perspective on trading.

If you would like to test some of the ideas I've mentioned, take a look at a risk-free demo account.

Also, feel free to drop me a line in the comments below.

After all, sharing the knowledge is how you stay at the top of the game.

Cheers and safe trading,

Chris