Market Structure is the backbone of every Smart Money trade. Before looking for order blocks or fair value gaps, you must first read the structure correctly — it tells you whether to look for longs, shorts, or to stay out entirely. SMC uses a precise set of terms to describe price behaviour.
The Building Blocks — Swing Points
All market structure starts with identifying swing points:
- Swing High — a candle with a higher high on both sides. Price reached a peak and reversed.
- Swing Low — a candle with a lower low on both sides. Price reached a trough and reversed.
Bullish vs Bearish Structure
Break of Structure (BOS)
A Break of Structure (BOS) occurs when price breaks a previous swing high (in an uptrend) or swing low (in a downtrend) — confirming the trend continues.
Bearish BOS: Price breaks below a previous Lower Low → Downtrend confirmed, look for short entries on pullback
Change of Character (CHOCH)
A Change of Character (CHOCH) is the first sign that the current trend is reversing — it breaks the opposing swing point for the first time.
Bullish CHOCH (in downtrend): Price breaks above the most recent Lower High for the first time → First warning the downtrend may be ending.
Internal vs External Structure
| Type | What it is | Use |
|---|---|---|
| External Structure | Major swing highs and lows on the higher timeframe (weekly/daily) | Determines the overall bias — long or short |
| Internal Structure | Minor swing points within the larger move (lower timeframe) | Used to time precise entries within the HTF direction |
Premium and Discount Zones
Every price range has a 50% midpoint. SMC defines zones relative to this midpoint:
- Premium Zone — Above the 50% midpoint of the recent range. Price is "expensive." Institutions SELL here.
- Discount Zone — Below the 50% midpoint. Price is "cheap." Institutions BUY here.
Only buy in Discount Zones (below 50% of range) when structure is bullish
Only sell in Premium Zones (above 50% of range) when structure is bearish
Never buy at premium or sell at discount — that is what retail does.
NSE Real Use Case
BANK NIFTY daily chart: After a clear uptrend of Higher Highs and Higher Lows, price forms a CHOCH by breaking below the most recent Higher Low on high volume. This is the first warning. Three sessions later, a BOS below the previous swing low confirms the structure has shifted bearish. SMC traders who identified this transition shorted BANK NIFTY 800 points before retail accepted the downtrend was real.