Understanding market structure is fundamental to successful trading. Markets generally move in one of two primary patterns: trending or sideways (also known as range-bound). Recognising which type of market you're trading in will determine your strategy, risk management approach, and profit expectations. This knowledge forms the backbone of technical analysis and helps traders align their methods with prevailing market conditions.

Trending Markets

A trending market is characterised by a series of higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend). In trending markets, price moves directionally over time, creating clear momentum in one direction. Trending markets typically account for approximately 30% of all market activity, making them highly sought after by traders due to their profit potential.

Below is an example of a long-term trend since April 2024 GOLD.

Characteristics of Trending Markets

Clear directional bias: Price consistently moves in one direction over multiple periods

Strong momentum: Volume often increases during trend moves

Breaking through key levels: Price regularly breaks through previous support or resistance levels

Sustained movement: Trends can last from days to months, depending on the timeframe.

The ASX200 and most indices contain these characteristics 75% of the time. Bulls buy the Indices and Bears sell only if there is a fundamental or geopolitical reason.

Example of the ASX Daily chart, note the defined peaks and valleys. This is what is termed as structure.

Characteristics of Trending Waves:

Strong momentum: Price moves decisively with increased volume

Minimal pullbacks: Any counter-trend moves are shallow and brief

Breaking key levels: Waves often break through important support or resistance zones

Extended duration: Waves can last several hours to several days, depending on the timeframe.

Consolidation Phases

Between trending waves or swings defined by HH's, LH's and LL's & and HL's denoted on the chart labels (indicator zigzag++), markets enter consolidation phases.
Consolidation is a period where price moves sideways, "digesting" the previous waves' gains or losses. During consolidation, the market is essentially taking a breather and traders are often taking profits before potentially continuing in the trend direction depending on targets.

Purpose of Consolidation
Profit-taking: Early trend followers take profits, creating temporary selling/buying pressure

New participants: Late entrants and counter-trend traders enter the market

Equilibrium: Supply and demand temporarily balance out

Preparation: The market gathers energy for the next potential leg

Types of Consolidation

Horizontal consolidation: Price moves sideways in a range

Flag patterns: Brief consolidation against the trend direction

Pennant patterns: Triangular consolidation with decreasing volatility

Example of a daily chart -Move up-consolidation-Move up creating bull flags and ranges.

Sideways Markets (Range-Bound Markets)

Sideways markets occur when the price oscillates between clearly defined support and resistance levels without establishing a clear directional trend. These markets represent approximately 70-75% of all trading activity, making them the most common market condition.

Characteristics of Sideways Markets:

Defined boundaries: Clear support and resistance levels contain price action

Oscillating movement: Price bounces between these levels repeatedly

Lack of directional momentum: No sustained movement in either direction

Mean reversion tendency: Price tends to return to the middle of the range

Trading Implications:

Range trading: Buy near support, sell near resistance

Breakout potential: Ranges eventually break, leading to trending moves

Patience required: Profits are typically smaller and take longer to materialise

Higher win rate: But smaller average wins compared to trend trading

Identifying Market Type

Trending Market Indicators

Price is consistently making new highs or lows

Moving averages sloping clearly in one direction

Price staying above/below key moving averages

Volume expansion during directional moves

Sideways Market Indicators

Price repeatedly touches the same support/resistance levels

Moving averages flattening or intertwining

Price oscillating above and below moving averages

Decreasing volume and volatility