SMT Divergence
← Trading 101
Structure04 / 12 · 2 min read

Break of structure (BOS)

The signal that a trend is continuing, and the trap of the breakout that isn't one.

Read first
03 · Structure

The break of structure (BOS) is a fundamental element of reading price structure, because it either confirms a trend or warns you that it is changing. It happens when the market breaks a key level of the previous sequence.

Break of structure in an uptrend then a downtrend, with the broken levels
If you are long, all is well as long as price keeps breaking HHs. The day it breaks an HL, the trend may be changing.

In an uptrend

  • Breaking an HH confirms the continuation of the bullish move. If you are long, you are fine as long as price keeps breaking HHs.
  • Breaking an HL suggests a possible loss of momentum, a prelude to a change of direction. If you are long, be careful.

In a downtrend

  • Breaking an LL confirms the downtrend. As long as price keeps breaking LLs, your short is in good shape.
  • Breaking an LH signals weakening selling pressure. If you are short, consider taking profits or closing your trade.

Always wait for the close

Always wait for the candle to close before deciding whether it really is a BOS:

  • A close beyond the wick, or beyond the open/close: that is a BOS.
  • But if price goes past the previous high or low without closing beyond it, beware of the trap: it may be a liquidity grab, with a real risk of an immediate move back the other way, as here:
The difference between a wick poking above the level and a real break of structure with a close
Left, a wick that pokes through without closing: not a BOS. Right, a clean close beyond the level.
Tip

A valid BOS is not just a wick poking through: it needs a clean close beyond a high or a low, the sign of a real imbalance between buyers and sellers. Some prefer a close above the wick; for me, a close beyond the open/close is enough.

The higher the timeframe on which the BOS happens, the more significant the signal: Weekly > Daily > H4 > H1 > M15 > M5 > M1.

A BOS often comes with a liquidity grab, triggering the stop losses placed beyond the last structure point: that is the fuel of the move.

Key point

The BOS confirms the trend or gives the first signal of a shift in market dynamics. To be confirmed, it must close beyond the previous key level, otherwise it may be a trap.

Cover of the book Beat the Market with SMT Divergences

The rest is in the book

Beat the Market with SMT Divergences

These pages are the first part of the book. The rest answers the two questions that matter: which pair to trade, and when to enter.

Buy on AmazonWhat's inside