Market structure is the order in which a market makes its swing highs and swing lows. Smart money concepts (SMC) build every later idea on it: breaks of structure, liquidity, order blocks and fair value gaps all start from the swings you mark. You need a labelling method strict enough that two traders marking the same chart get the same answer.
If swing points and trends are new to you, start with the technical analysis course, in particular Find the trend and draw trendlines.
What you will learn
- A fixed rule for confirming a swing high or swing low
- How to label bullish, bearish and ranging structure
- Which swing protects the trend, and when it moves
- How external structure differs from internal structure
Confirm a swing before you mark it
A swing high is a candle whose high is above the highs of the two candles before it and the two after it. A swing low is the mirror image. You cannot know a swing exists until two more candles have closed, and a high that looks like the top while it is still forming often turns out not to be.
SMC traders add a second test: the pullback must be real. A common rule is that a later candle has to close below the low of the candle that made the high (or above the high of the candle that made a swing low). Without that close, the market has only paused.
Take five one-hour GBP/USD candles with highs of 1.2650, 1.2668, 1.2684, 1.2671 and 1.2660. The middle candle's high, 1.2684, is above the two highs on each side, so it passes the first test once the fifth candle closes. That middle candle had a low of 1.2662. The fifth candle closes at 1.2655, below 1.2662, so the pullback is confirmed and 1.2684 goes on your chart as a swing high.
Use the same rule on every chart. If you change it from day to day, your structure changes with it, and so does every level you build from it.
Label the structure
Compare each swing with the last swing of the same kind.
- Higher highs and higher lows make bullish structure.
- Lower highs and lower lows make bearish structure.
- Highs and lows that neither rise nor fall in sequence make a range.
Take these four-hour EUR/USD swings in order: low 1.0820, high 1.0905, low 1.0858, high 1.0942, low 1.0890. Each low is above the one before (1.0820, 1.0858, 1.0890) and the second high is above the first, so the structure is bullish. The two pushes up were 85 and 84 pips and the two pullbacks were 47 and 52 pips, so the trend is moving at an even pace.
Find the protected swing
Higher lows do not all carry the same weight. The protected low (some traders call it the strong low) is the higher low that produced the most recent higher high. While price stays above it, the bullish structure holds. The most recent high is the weak high, the one the trend is expected to break next.
In the example, the 1.0858 low led to the break above 1.0905 and the new high at 1.0942, so 1.0858 is protected. The newer low at 1.0890 has not produced a higher high yet, so it is not protected.
- If price closes above 1.0942, the 1.0890 low becomes the protected low.
- If price falls below 1.0890 but holds above 1.0858, the pullback is deeper than the last one and the structure is still bullish.
- If a four-hour candle closes below 1.0858, the bullish structure has broken.
In bearish structure the roles swap. The protected high is the lower high that produced the latest lower low, and the weak low is the one price is expected to break next.
External and internal structure
External structure, also called swing structure, is the set of main swings on the timeframe you use for direction, such as the four-hour swings above. Internal structure is the smaller swings inside one leg, usually inside a pullback. You see them on a lower timeframe.
The two often disagree. On a 15-minute chart, the pullback from 1.0942 to 1.0890 falls to 1.0915, bounces to 1.0928, then drops to 1.0890. That is a lower high and a lower low, so internal structure is bearish while external structure is still bullish.
SMC traders look for exactly this combination: a bullish external trend with a bearish internal pullback. A 15-minute close back above 1.0928, the last internal lower high, is the first sign the pullback has finished and internal structure agrees with the trend again. Lesson 2 shows how to read that close.
Which timeframes should you pair? Use one for external structure and a much faster one for internal structure, such as the daily chart with the one-hour, or the four-hour with the 15-minute. Line up a higher-timeframe trend with a lower-timeframe entry covers the method in full.
Check your understanding
Swings come in as low 1.3000, high 1.3080, low 1.3035, high 1.3120. Which low is protected?
1.3035. It is the higher low that produced the break above 1.3080 and the new high at 1.3120. A four-hour close below 1.3035 would break the bullish structure.
On the 15-minute chart, price makes a lower low inside a four-hour pullback. Has the trend turned bearish?
No. That is internal structure. The four-hour trend stays bullish until a four-hour candle closes below the protected low.
Why wait for two more candles before marking a swing high?
Until two candles have closed with lower highs, the candle you are looking at can still be exceeded. If you mark it early, your structure shifts every time the chart moves.
Key points
- Confirm a swing with a fixed rule: two candles either side, plus a close beyond the swing candle's range.
- Higher highs and higher lows make bullish structure; lower highs and lower lows make bearish structure.
- The protected low is the higher low that made the latest higher high. It moves up only after a new high.
- External structure sets your direction. Internal structure shows when a pullback inside it may be ending.
Next lesson: Tell a continuation break from a change of character
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