A break of structure (BOS) is an important concept that can indicate trend continuation rather than trend reversal. Essentially, BOS occurs when a market makes a new high above the previous one during an uptrend without breaking the previous low. In other words, the weak resistance was broken, forming a new high and indicating a continuation of the bull trend.
Figure 1: Break of structure
Similarly, in a downtrend, BOS is detected when a new low is set without crossing the previous high. This pattern emphasizes the continuation of the current direction. Break of Structure theory begins with identifying the current trend by analyzing existing tops and bottoms.
For this, traders should observe whether there are successively higher highs and lower lows in an uptrend or lower highs and lower lows in a downtrend. It is important to understand that the structure can vary in different time periods. A bullish pattern in one may simply be a corrective phase in a broader decline in the other.
To accurately identify, traders focus on identifying key bullish points: a strong swing point that must not be broken to support the trend, and a weak swing point that is expected to be broken if the trend continues.
An authentic BOS is confirmed when the price closes strongly past the weak swing point, marking new highs or lows in the trend. While a wick beyond this point can suggest a BOS, it is considered less reliable and might simply be an attempt at a liquidity sweep.
Figure 2: Strong and Weak Swing Points Figure – Source: FXopen
Trading BOS
Entry – Traders can identify a BOS aligned with the current trend, utilizing a retracement tool between high and low (in an uptrend) or low and high (in a downtrend) of the range the BOS originated from.
Stop Loss – Stop losses can be placed just below the channel (in an uptrend) or above the peak (in a downtrend) of the swing that prompted the BOS, providing a potential guard against a reversal.
Take Profit – The take profit may be placed at the previous high or low that initiated the retracement or at another strategic point, such as an order block that aligns with the current momentum.
Order blocks (referred to as "OBs") are orders at a specific price range or level that are located throughout the price chart and on different time frames at which participants have placed their orders and initiated moves. At the right time, price may retrace up to an order block and reverse from that point. Depending on whether traders are bullish or bearish, its is practiced by entering at one end of the OB and a placing a stop loss at the other.
Figure 3: Order Blocks
Bullish OB - A down close or a series of down-close candles that run on sell-side liquidity.
Bearish OB - A down close or a series of up-close candles that run on buy-side liquidity.
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