The Break of Structure (BOS) Trading Strategy Explained
Understanding market structure is fundamental to consistent trading profits. This guide explores the "Over and Under" Break of Structure (BOS) pattern, a key concept in Price Action Analysis. Learn how this pattern signals potential trend weakness or reversal and how it relates to Smart Money Trading tactics like liquidity hunts, representing potential Market Manipulation Strategies.
Mastering the Break of Structure: Video Tutorial
Watch this video to understand the BOS pattern, its variations, and how to incorporate it into your trading strategy.
What is a Break of Structure (BOS)?
Market structure is defined by support and resistance levels created by swing highs and lows. Trends are characterized by sequences of these swings:
- Uptrend: Series of higher highs (HH) and higher lows (HL).
- Downtrend: Series of lower lows (LL) and lower highs (LH).
A Break of Structure (BOS) is the first indication that the prevailing trend might be weakening or reversing. It occurs when the established pattern is violated:
- In an Uptrend: A BOS occurs when price creates a new lower low (LL) and potentially a lower high (LH), breaking the HH-HL sequence.
- In a Downtrend: A BOS occurs when price creates a new higher high (HH) and potentially a higher low (HL), breaking the LL-LH sequence.
A BOS doesn't guarantee a reversal, but it's a critical warning sign from the market, demanding attention in your Price Action Analysis.
The "Over and Under" BOS Pattern
This specific BOS pattern involves a liquidity grab and subsequent structure break, often seen as a Market Manipulation Strategy.
Bullish Over and Under (End of Downtrend):
- Price creates a lower low (LL).
- Price creates a lower high (LH).
- Price breaches the previous LL, creating a new lower low (Liquidity Grab below the low - the "Under").
- Price then breaks above the previous LH, forming a higher high (HH) (Break of Structure - the "Over").
- Entry Zone: Look for long entries when price returns to the zone created between the two lows (the initial LL and the new lowest LL).
Bearish Over and Under (End of Uptrend):
- Price creates a higher high (HH).
- Price creates a higher low (HL).
- Price breaches the previous HH, creating a new higher high (Liquidity Grab above the high - the "Over").
- Price then breaks below the previous HL, forming a lower low (LL) (Break of Structure - the "Under").
- Entry Zone: Look for short entries when price returns to the zone created between the two highs (the initial HH and the new highest HH).
This pattern differs from a classic Head and Shoulders primarily in the depth of the second swing (it goes significantly beyond the first) and the earlier entry opportunity near the initial swing zone, offering potentially better risk/reward.
Break of Structure & Liquidity Hunts
Large institutions (Smart Money Trading players) need liquidity to fill large orders without causing excessive slippage. Swing highs and lows are natural liquidity pools because traders place stop-loss orders there.
The "Over and Under" pattern often incorporates a deliberate liquidity hunt (stop-loss hunt). For example, in the bearish pattern, price is pushed above the previous high (the "Over") specifically to trigger buy-stop orders (liquidity grab). Once liquidity is absorbed, price reverses, breaking the previous low (the "Under" structure break).
Recognizing this dynamic – the hunt for liquidity followed by a BOS – is crucial for aligning with potential institutional moves and avoiding traps set by Market Manipulation Strategies.
How to Trade the Break of Structure Setup
The BOS pattern is most effective after a significant trend move, applicable across various timeframes.
Short Signal (Bearish BOS):
- Identify a prevailing uptrend (HHs, HLs).
- Observe the "Over and Under" pattern: New HH (liquidity grab), followed by break below previous HL (BOS, forms LL).
- Plan entry on a retracement back into the zone between the initial HH and the highest HH.
- Place Stop Loss above the highest HH.
- Take Profit Targets: Near the first significant low (initial HL) and potentially the new lower low (LL).
Long Signal (Bullish BOS):
- Identify a prevailing downtrend (LLs, LHs).
- Observe the "Over and Under" pattern: New LL (liquidity grab), followed by break above previous LH (BOS, forms HH).
- Plan entry on a retracement back into the zone between the initial LL and the lowest LL.
- Place Stop Loss below the lowest LL.
- Take Profit Targets: Near the first significant high (initial LH) and potentially the new higher high (HH).
Adding Confluence: Supply/Demand & Divergence
Since a BOS doesn't always lead to a full reversal, adding confluence factors increases probability.
Supply and Demand Zones:
Refine entries by identifying supply (for shorts) or demand (for longs) zones within the BOS entry area, often originating from the candle that initiated the strong move leading to the BOS.
- Demand Zone (for Longs): Look for the last bearish candle before the strong up-move that caused the bullish BOS. Enter when price returns to this zone.
- Supply Zone (for Shorts): Look for the last bullish candle before the strong down-move that caused the bearish BOS. Enter when price returns to this zone.
Divergence Strategy:
Use oscillators (RSI, MACD, Stochastic) to spot divergence during the retracement phase after the BOS, adding confirmation.
- Bearish Divergence: After a bearish BOS, as price retraces upwards towards the entry zone, look for the oscillator making lower highs while price makes equal or slightly higher highs. This confirms weakening buying momentum.
- Bullish Divergence: After a bullish BOS, as price retraces downwards towards the entry zone, look for the oscillator making higher lows while price makes equal or slightly lower lows. This confirms weakening selling momentum.
Conclusion: Leveraging BOS for Smarter Trading
The Break of Structure, particularly the "Over and Under" pattern, provides valuable insights into potential trend shifts and institutional activity (liquidity hunts). By understanding the mechanics of BOS and combining it with confluence factors like supply/demand zones and divergence, traders can enhance their Price Action Analysis and identify higher-probability setups aligned with Smart Money Trading principles, while better navigating potential Market Manipulation Strategies.