Understanding Break of Structure BOS Trading
Break of Structure – BOS trading is an essential concept in technical analysis that refers to when the price of an asset breaks out of an established support or resistance level. This signals a potential shift in market sentiment and provides trading opportunities.
What is Break of Structure (BOS)?
A Break of Structure (BOS) occurs when the price of an asset decisively breaks below a support level or above a resistance level that has been holding for some time.
For example, if a stock has been ranging between $50 support and $60 resistance for weeks, a Break of Structure happens if the price breaks below $50 support or above $60 resistance with strong momentum.
Key characteristics of a BOS:
- Decisive breach of a key support or resistance level
- High trading volume on breakout
- Continuation of price in direction of breakout
A BOS indicates the market sentiment has shifted and a new trend may be starting. It represents an opportunity for traders to enter into a high probability trade.
Why is BOS Important in Trading?
Identifying Breaks of Structure is crucial for traders for several reasons:
1. Signals Potential Trend Change
A BOS often precedes the start of a new trend. By identifying BOS early, traders can capitalize on emerging trends.
2. Provides Entry/Exit Points
BOS provides clear areas for traders to enter or exit trades. Traders may go long when price breaks resistance or go short when support breaks.
3. Confirms Other Indicators
A BOS can act to confirm signals from other technical indicators. This gives traders greater confidence in taking a trade.
4. Sets Stop Losses
The broken support or resistance levels become key areas to place stop losses. This helps with effective risk management.
In summary, trading BOS allows traders to capitalize on high probability setups with predefined entry, exit and stop loss areas.
How to Trade Break of Structure (BOS)
Here are the key steps for effectively trading Breaks of Structure:
1. Identify Key Support/Resistance Levels
Use technical analysis to identify significant support and resistance levels that price has respected for some time. These become breakout trigger levels.
2. Wait for Decisive Break
Wait patiently for price to decisively break the support or resistance level with strong momentum and high volume. Avoid premature entries.
3. Enter New Trend Direction
Enter the trade in the direction of the new trend once BOS is confirmed. Go long on resistance breaks and short on support breaks.
4. Set Stop Loss at Breakout Level
Place stop loss at the breakout level to control risk on the trade. Revise stop as trend progresses.
5. Take Partial Profits at Next Level
Book partial profits at the next significant support/resistance level in direction of trend. Move stop to breakeven.
6. Trail Stop Higher to Lock Gains
Trailing stop higher allows profits to run as long as trend remains intact. Exit when trailing stop is hit.
By following these steps, traders can refine high probability BOS setups into a rules-based trading strategy.
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Real World Example of a BOS Trade
Let’s see an actual trade example of a Break of Structure setup:
1. Resistance Level Identified
The stock has faced stiff resistance at $60 for last few weeks. This becomes the trigger level for a breakout trade.
2. Price Breaks Resistance
Price rallies rapidly above $60 resistance with heavy volume. This confirms a high probability BOS to the upside.
3. Long Entry Order Triggered
A buy stop order at $61 gets triggered on resistance breakout for long entry in direction of emerging uptrend.
4. Stop Loss Set
Initial stop loss is placed just below recent swing low at $55 to allow for some retracement.
5. Take Profit at Next Level
Partial profits booked near $67 resistance area. Remaining position left open to capture further upside.
6. Trail Stop Higher
Stop is trailed higher below rising 20-day moving average to lock in open profits as uptrend extends.
Using the structured BOS system allowed capturing a significant trend in the stock for sizable gains.
BOS Trading Tips
Here are some useful tips for effectively trading Break of Structure setups:
- Use other indicators – Combine with indicators like volume and momentum oscillators to confirm BOS.
- Mind risk management – Employ sound risk management with stop losses and position sizing.
- Have patience – Avoid premature entries before confirmation of BOS.
- Book partial profits – Scale out of winning trades at key levels to lock in open gains.
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Common BOS Trading Mistakes
Here are some common mistakes traders make when trading Break of Structure:
- Acting early – Entering on false breakouts before BOS is truly confirmed or validated.
- No stop loss – Neglecting to use a stop loss when trading BOS leads to uncontrolled risk.
- No profit taking – Not booking partial profits along the way leads to lost open trade gains.
- Overtrading – Blindly trading every BOS signal without a structured plan leads to overtrading.
- No confirmation – Taking signals from standalone indicators without additional confirmation.
Avoiding these errors will dramatically improve trading performance when taking BOS setups.
Conclusion
Break of Structure is a simple yet powerful concept that signals potential trend changes in the market. By mastering the identification and trading of BOS, traders can enter emerging trends early with predefined entry, exit and risk levels.
Combining BOS with robust risk management creates a high probability trading approach in range bound or trending markets. While no trading strategy is perfect, the structured BOS system provides traders an edge with favorable risk-reward ratios.
So sharpen your technical analysis skills, practice patience for confirmation, and start trading Breaks of Structure to boost your trading success!