Trend analysis is the first step to building a trade plan or to analyze any trade. In my previous newsletter, we discussed analyzing trend using Renko charts. We discussed how combining Exponential Moving Average and price structures can help in making trend analysis simple. Renko charts are also known as trend charts as visualizing trend on Renko is very simple. But trend can be analyzed on PnF charts as well. In fact, trend on PnF charts have more weightage.

In this newsletter, we discuss analyzing trend using Market structures on PnF charts.

Understanding Market Structures

As per the Dow theory, prices move in waves. When the price moves up and reverses, this reversal point is called a swing high and when price moves down and reverses, this reversal point is called a swing low. Market structures are the price pattern or price formation that form at these reversal points. These patterns signify important lows or highs in the trend.

On PnF chart, these Highs are known as Mini tops (MT), and the Lows are known as Mini bottoms (MB). Mini tops and Mini bottoms are simply bull trap and bear trap respectively.

It is important to note that all traps are not Mini tops or bottoms. However all all Mini tops and bottoms are traps.

Use cases of Mini tops and Mini bottoms

There are three important roles that these MT or MB play in trend analysis:

1. In an uptrend, the low of Mini Bottoms are likely to hold and each Mini Bottom will be higher than the previous one. However a Mini Top formed in an uptrend are likely to get negated.

2. Similarly, in a downtrend, the high of Mini Tops level are likely to hold and high of each Mini Top will be lower than the previous one and Mini Bottoms are likely to get negated in a downtrend.

3. Mini Bottoms and Tops act as an important support and resistance levels. When there are 2 or more Mini Bottoms forming at the same price levels, it acts as a support level. When there are 2 or more Mini Tops forming at the same price levels, it can act as a resistance level.

4. Mini Bottoms and Tops can act as a great trailing stop loss mechanism. When the most recent Mini Bottoms and Tops is breached, it is probable that the trend could have changed.

Observe the chart below. The price was first in an uptrend and later in a downtrend. Observe how in an uptrend the MB were not breached easily and how MT were not breached easily in a downtrend.

Observe the chart below of EICHERMOT. The two lines shows the consolidation where two or more MT and MB formed. The breakout from the zone resulted in a strong price movement.

How to use Market structures to trade?

The issue with using MT/MB is that a MB will be marked only if the previous MT is breached. In similar ways, MT will be marked only if the previous MB is breached. So, if a trader wants to participate at the formation of MT or MB it would be difficult to ascertain if the point is actually a market structure unless the previous MT/MB is breached. However there are instances where only MBs are active which make the understanding of market structures very simple.

Therefore, we should preferably trade patterns such as Anchor FT, ABC, or Turtle patterns after the MB or MT is formed. Add a trend filtering indicator like EMA line, Super trend, or MAST to add context to the chart and we have a PnF setup.

In the below chart, it can be observed that the MB are forming within the MAST indicator. Adding MAST on the chart adds context to the analysis.

The method of trend analysis discussed here is applicable on all the Box sizes. I have explained the concept in more detail using other examples in the following YouTube video. Do check it out!!!! 👇🏻👇🏻👇🏻👇🏻