A Break of Structure in trading refers to a clear indication of continued order flow in the current direction, identified by the price movement breaking past the established highs and lows of a trend. This concept is integral in trend analysis and helps traders understand the momentum and potential future direction of the market.
In this article, I will explain the break of structure in depth because it’s the most basic concept of smart money in trading. So make sure to read the full article.
Basic market structure
Market structure in trading is just the way prices move over time. There are mainly three types:
- Uptrend: This is when prices keep going higher. You’ll see new highs being made and prices don’t drop below previous low points.
- Downtrend: Here, it’s the opposite. Prices keep dropping, making new lows, and they don’t go above the old high points.
- Range-Bound: In this case, prices bounce up and down, but they stay within a certain range. They don’t make new highs or new lows.
Now, about Break of Structure (BoS): It’s a concept that really only makes sense in uptrends and downtrends. It happens when prices break through an important high in an uptrend or a low in a downtrend. This is a sign that the trend is strong and likely to continue. But in a range-bound market, where prices aren’t making new highs or lows, Break of Structure doesn’t really apply.
Types of Break of structure
There are two types of BOS depending on the direction and breakout.
Bull Break of Structure (Bull BoS):
This occurs when the price action breaks above the swing high in a trend, indicating a strong upward momentum and suggesting a continuation of the bullish (upward) trend.
Bear Break of Structure (Bear BoS):
Conversely, this happens when the price breaks below the swing low, signaling a strong downward momentum and potentially indicating a continuation of the bearish (downward) trend.
Difference between Bull and Bear break of structure
Here’s a table to differentiate between Bull BoS and Bear BoS:
|Bull Break of Structure (Bull BoS)
|Bear Break of Structure (Bear BoS)
|Occurs when the price surpasses a previous high in a trend.
|Occurs when the price drops below a previous low in a trend.
|Suggests a potential continuation of an upward trend.
|Indicates a potential continuation of a downward trend.
|Higher highs and higher lows in an uptrend.
|Lower lows and lower highs in a downtrend.
|Considered a signal to look for buy opportunities.
|Seen as a signal to look for sell opportunities.
|Implies that buyers are dominating and pushing the prices up.
|Suggests that sellers are in control, driving prices down.
The Break of Structure helps forecast whether the market will continue its existing trend or reverse its direction. This insight is valuable for several reasons:
- Predicting Market Direction:
- By identifying a BoS, traders can anticipate if the current trend will persist or if a reversal is on the horizon. This understanding aligns their strategies with the likely future market movements.
- Trading with Market Makers:
- Recognizing a confirmed BoS enables traders to align their trades with the actions of market makers. When a BoS confirms the continuation of a trend, it becomes easier and more confident to trade in that direction.
- Timing Entry and Exit Points:
- A BoS can also be a critical signal for timing market entries and exits. For instance, a Bull BoS in an uptrend suggests a good entry point for a long position, while a Bear BoS in a downtrend might signal a favorable moment to exit or take a short position.
Overall, understanding and utilizing the Break of Structure not only enhances the ability to predict market trends but also aligns trading strategies with the powerful forces driving market movements, increasing the potential for successful trades.
How to trade BOS in trading?
Trading the Break of Structure (BoS) effectively requires combining it with other strategies for better accuracy in forecasting future price direction. Here’s a simplified explanation of how you can use BoS in conjunction with a moving average and candlestick patterns strategy:
- Setting Up:
- First, identify the lower lows and lower highs in an downtrend.
- Add an 21-period Exponential Moving Average (EMA) to your chart.
- Identifying the BoS:
- A Break of Structure occurs when the price moves below these lower lows. This indicates potential for the price to continue moving down.
- Executing a Sell Trade:
- After a bearish Break of Structure, wait for a bearish candlestick pattern to form, like a Bearish Engulfing pattern or a Pin Bar. This is your signal to enter a sell trade.
- Closing the Trade:
- Monitor the price in relation to the EMA. Close your trades when the price breaks through the EMA, signaling a potential change in trend or loss of momentum.
Remember, this strategy is a basic example to help you understand how to integrate BoS into your trading. It’s important to develop and test your own strategies, considering your trading style and risk tolerance. Using BoS as part of a broader strategy can enhance the effectiveness of your trades by providing additional confirmation of market trends.
Case Study: Trading with Bull BoS and Demand Zone
In this trade, I observed a clear Bull BoS in the market. This was identified when the price broke above a previous significant high, indicating a strong upward momentum.
Identification of Bull BoS:
- The market was trending upwards, making higher highs and higher lows.
- A Bull BoS was confirmed when the price surpassed a recent high point, signaling a potential continuation of the uptrend.
Formation of Demand Zone:
- After the Bull BoS formation, the price retraced back to the region of the breakout, forming what is known as a demand zone.
- This demand zone was located right around the area where the BoS occurred, making it a significant level for potential order accumulation.
- Observing the price action, I waited for the price to revisit this demand zone.
- As anticipated, the price entered the demand zone and started to show signs of order accumulation. This was my cue to prepare for a buy trade.
- Soon after filling orders in the demand zone, the price began to move upwards.
- This movement confirmed my analysis, and I entered a buy trade, capitalizing on the strong upward momentum.
- The trade offered a high risk-reward ratio, as the entry point at the demand zone provided a clear stop-loss level below the zone, and the upward potential was significant due to the confirmed uptrend.
To wrap up, the Break of Structure (BoS) is a really important idea in trading. It helps us see if the market will keep going up or down. We learned that combining BoS with other tools, like demand zones or candlestick patterns, makes our trading strategies even better.
Remember, BoS is a great guide, but it works best when you use it with your own trading plan. It’s all about understanding the market better and making smarter trading decisions. Keep practicing this concept, and you’ll get the hang of how to use it to your advantage in trading.