In trading, BOS (Break of Structure) refers to a significant disruption in the prevailing market price pattern, often indicating a potential trend reversal or significant price movement.
Let’s talk about something really important in trading – understanding what “smart money” means. This includes big institutions and experienced investors who can have a significant influence on the markets. Now, one way to get ahead in trading is to pay attention to something called Break of Structure, along with changes in how the market behaves, fundamental analysis, and the idea of liquidity.
All of this can give you an advantage over other traders. So, before you make your next trade, I encourage you to read through this blog and soak in as much useful information as possible.
Table of Contents
- What is Break of Structure (BOS)?
- How To Use Break of Structure in Trading?
- BOS Trading Strategy –
- Tips From My Trades-
- KEY TAKEAWAYS
What is Break of Structure (BOS)?
In trading, “Break of Structure” is a term used to describe a situation where a market’s price movement disrupts the established pattern, often signaling a potential change in trend direction. It’s a critical concept because it helps traders identify shifts in market sentiment.
Example: Let’s say you’re trading a bullish trend, and the price has been making higher highs and higher lows. Suddenly, the price drops below the previous low, breaking the structure. This is a Break of Structure, suggesting a potential shift from a bullish to a bearish trend.
Think of BOS as a signal that indicates the end of an existing market trend and the potential formation of a new one.
Examples of how break of structure plays role in both short term timeframe( 15 min EUR/USD) & Long term time frame ( daily chart of EUR/USD)
How To Use Break of Structure in Trading?
Break of Structure, serves as a versatile tool for informed trading and investment decisions. This concept is integral to the smart money approach, allowing traders to align with institutional investors and significant market players. Such alignment empowers traders to seize opportunities within major trends and harness explosive directional momentum for their trades.
Here is how to use BOS in any trading setup –
1. Identifying Smart Money:
Institutional investors, or “smart money,” often drive the markets. Pay close attention to significant price movements, as they can reveal the intentions of these big players.
Statistical Approach: Big players don’t place large orders all at once. Find those levels on charts where price movements are significant. Try to identify the order flow. Take, for instance, the example of Reliance. You can then place your entry in the direction of the smart money.
Break of Structure often occurs near key liquidity areas. Traders can exploit this by entering positions near these levels to take advantage of price movements.
Example: Notice a Break of Structure near a major support level, indicating a possible trend reversal. This could be an excellent entry point.
3. Order Blocks:
Order blocks are areas where significant trading activity has taken place. Identifying these blocks can help you anticipate Break of Structure points.
Real-Life Example: In one of my trades, I noticed an order block near a support level. When the price broke above this block, it marked a Break of Structure and an opportunity for a long position.
BOS Trading Strategy –
To execute buy and sell orders based on BOS, I follow a step-by-step process. This approach helps me align with market sentiments and steer clear of liquidity grabs and false breakouts.
STEP 1: Chart Analysis & Time Frame Setting
I begin by focusing on higher timeframes, such as the weekly and daily charts. Here, I pinpoint all major demand and supply zones.
It’s essential to keep in mind that the higher the timeframe, the more significant the support and resistance levels become. So, I meticulously mark all the support and resistance levels I can identify as I progress from weekly down to daily charts.
STEP 2: Identify Market Structure Breakout
This breakout is a crucial signal that I’ve included in my trading strategy. It’s like a warning sign that the market’s usual pattern is about to change, which often leads to a Break of Structure (BOS). To use this approach effectively, I look at how long the current pattern has been in place, how important it’s been historically, and how strong the breakout is to predict the potential for a BOS.
STEP 3: Volume Confirmation
Volume is a key player in my BOS strategy. When I’m tracking an asset and it breaks through a support or resistance level, I always keep an eye on the trading volume. If the volume surges significantly along with the breakout, that’s a strong confirmation of the BOS’s importance. This simple but effective step in my strategy ensures that I’m on the right track.
STEP 4: Look For Candlestick Patterns
I rely on candlestick patterns to confirm a BOS. These patterns give me clear visual signals. I keep an eye out for candlestick patterns like engulfing patterns, hammers, or shooting stars that match the direction of the BOS. This adds a visual element to my strategy, making it easier to spot opportunities.
STEP 5: Confirmation from Other Indicators
I incorporate other technical indicators like the Relative Strength Index (RSI) and Moving Averages to back up the BOS. These indicators offer extra insights into the strength of the price move. By checking them alongside the BOS, I can gain a more comprehensive view of the market and make informed trading decisions.
Tips From My Trades-
Advanced BOS Trading Tips
Enhance your Break of Structure (BOS) trading strategy with these advanced techniques:
- Wick Analysis: Watch for long candlestick wicks beyond support or resistance levels as they signal strong rejection.
- RSI Confirmation: Combine BOS with RSI to confirm overbought or oversold conditions.
- Trend Awareness: Always consider the prevailing trend to increase BOS success rates.
- Volume Check: Analyze trading volume during a BOS to confirm market enthusiasm.
- Strategic Stop Loss: Place your stop-loss just beyond the breached level to limit losses in case of false breakouts.
- Fake Breakout Avoidance: Be conservative in your BOS criteria to filter out false signals.
- Liquidity Trap Awareness: Watch out for liquidity grabs and avoid narrow stop-loss placements.
- Trade Confluence: Seek confirmation from multiple technical indicators for stronger BOS setups.
- Continuous Monitoring: Stay vigilant in your BOS trades and adapt to changing conditions.
- Back Testing: Regularly backtest your BOS strategy with historical data to refine your approach.
- Break of Structure (BOS) and Change of Character (Choch) are advanced trading concepts that help traders align with institutional investors and smart money in the market.
- BOS is a key part of the smart money concept. It involves recognizing when the market structure is disrupted, potentially indicating a major trend change.
- To effectively use BOS in trading, traders can analyze factors such as candlestick patterns, volume, trend, and technical indicators like RSI.
- Look for specific candlestick patterns, especially those with long wicks that extend beyond support or resistance levels, as they can signal strong rejection.
- Combine BOS with the Relative Strength Index (RSI) to confirm overbought or oversold conditions and validate the BOS signal.
- Always consider the prevailing trend when identifying BOS opportunities, as trading in the direction of the dominant trend increases success probabilities.
- Analyze trading volume during a BOS, as a genuine BOS should be accompanied by a significant increase in trading volume to validate its significance.
- Position your stop-loss orders just beyond the breached level to limit losses in case of false breakouts.
- To reduce fake breakout risks, be conservative in your BOS criteria, and wait for clear confirmation signals.
- The key to success in BOS trading is continuous learning, backtesting, and adapting to changing market conditions.
- Implement solid risk management strategies, use proper position sizing, and never risk more than you can afford to lose.
[Note: This blog post is for informational purposes only and should not be considered as financial advice. Trading and investing in financial markets carry risks, and it’s essential to do thorough research and seek professional advice before making trading decisions.]
Frequently Asked Questions
Q1: What is break of structure trading?
Break of Structure (BOS) trading is a strategy that involves identifying key points where the prevailing market structure is disrupted, signaling potential trend reversals or significant market movements.
Q2: How to identify break of structure?
Identifying a Break of Structure (BOS) involves recognizing price action patterns, such as significant candlestick formations, volume spikes, and technical indicators that signal a disruption in the market’s current structure.
Q3: What is break of structure and change of character?
Break of Structure (BOS) and Change of Character (Choch) are advanced trading concepts that help traders align with institutional investors and smart money in the market. BOS indicates a disruption in market structure, often a precursor to significant price movements, while Choch signifies a change in the character of price action, often leading to trend reversals.
Q4: How to trade break of structure?
Trading a Break of Structure involves analyzing price action, volume, trend, and technical indicators for confirmation. Look for strong BOS signals and consider risk management strategies to minimize losses in case of false breakouts.
Q5: Why do Break of Structure fail?
Break of Structure (BOS) trades can fail due to factors like insufficient confirmation, false breakouts, sudden market changes, or poor risk management. It’s important to be cautious, diversify your trading portfolio, and continuously learn and adapt to reduce failure risks.