As a passionate active trader for over a decade, I rely extensively on analyzing structure to catch moves early that most technical traders miss. Rather than just skimming the surface, I want to provide an in-depth examination of powerful concepts like break of structure (BOS) and change of character (CHOCH) so you can truly master reading markets.
When understood properly, structure analysis acts like an X-ray revealing the current health of trends beneath price action alone. Let‘s dive deeper so you can witness the immense potential of integrating BOS and CHOCH into decisions.
Why Structure Trumps Standard Chart Patterns
Before focusing specifically on BOS and CHOCH signals, I think it’s important to address why structure offers certain advantages over more commonly referenced chart patterns.
While formations like head and shoulders, triangles, flags, etc. do illustrate useful context at times, they have notable downsides:
-
Lagging nature – By the time the pattern completes, much of move has materialized so risk/reward is less ideal. Key reversals happen before completion.
-
Subjectivity – One trader may see a head and shoulders while another views it as consolidation. Interpretations vary.
-
False signals – Just because the textbook pattern forms does not guarantee a tradable move. Payoffs can underwhelm.
-
Lure of bias – Traders often force patterns that align with their bullish/bearish bias rather than accepting what price tells.
Conversely, structure analysis concentrates directly on the core elements driving trends: the progression of swing highs and lows. The focus stays on actual price action behavior rather than shapes.
Let‘s examine how structure delivers signals sooner than patterns…
Real Chart Example
Above we see a 15-minute chart of crude oil futures exhibiting a bearish structure overall the last several hours with lower highs and lower lows.
However, observe how around 2:15 pm, we get a clear change of character signal as price forms a higher low (blue oval) relative to the previous swing lows. This initial CHOCH suggests upside momentum may be building despite the bearish structure.
Rather than waiting for a head and shoulders pattern to fully take shape over the next hour, the CHOCH delivered an early signal that a bullish move may materialize right at 2:15 pm. Capitalizing on these subtle shifts makes structure analysis valuable.
Keep in mind chart patterns can still offer useful context at times. But focusing on structure provides more objective, real-time feedback on when trends evolve.
Now that we’ve covered the advantages relative to patterns, let’s breakdown BOS and CHOCH with more examples…
Demystifying Key Market Structure Concepts
Before examining additional live chart illustrations, it’s important everyone clearly grasps the vital definitions.
What is Break of Structure (BOS)?
In any established trend, whether bullish or bearish, we expect to see a natural progression of higher highs/higher lows or lower lows/lower highs that align with the directional bias. A break of structure refers to price definitively closing beyond one of these swing points, disrupting the anticipated flow.
For example, in a downtrend, a BOS event occurs when price breaks above a prior lower high swing point. This signals potential exhaustion of the current move. Traders can interpret this as a shift that may lead to a deeper pullback or possibly a trend reversal unfolding.
Essentially, a valid BOS provides an early clue that the existing structure is weakening. It means you should closely analyze other indicators to confirm whether a significant move may materialize.
What is Change of Character (CHOCH)?
While BOS indicates potential deviations, change of character refers to price action that further supports the case for a noteworthy reversal. This could involve a clear higher low forming in a downtrend or lower high emerging in an uptrend.
CHOCH helps solidify that momentum is actually transitioning, not merely stalling temporarily.
When you see CHOCH develop after an initial BOS, the probability of a trend reversal increases substantially. But you still want affirming signals like a break of the prior swing high/low before assuming a full reversal is underway. Use CHOCH as a warning that a major move may materialize if additional upside/downside targets are reached.
Now let’s see how this translates to actual trading scenarios…
Real-World Examples of Structure Analysis
When interpreted correctly, BOS and CHOCH can highlight zones of interest, warning you that a potential opportunity may emerge if certain levels are challenged.
Gold 1-Hour Chart
Above we see an hourly chart on gold futures exhibiting a bearish structure for much of the morning with a series of lower highs and lower lows. In a strong downtrend, we would expect this pattern to continue.
However, observe how around 11:15 am, we get a clear BOS signal as price spikes above the prior swing highs to break structure. This warns the current downward pressure could be fading and sparks a consolidation period over the next few hours.
We then see change of character materialize as well around 2:15 pm when a definitive higher low forms compared to earlier swing lows. This CHOCH after the initial BOS provides solid evidence upside momentum is building and a bullish structure wants to emerge.
Sure enough, once short-term resistance is challenged around 2:45 pm, we see a strong push higher confirming the bullish structure taking hold with a series of higher highs and higher lows.
The ability to recognize the BOS and CHOCH in real-time allowed an early entry right as the reversal gained steam versus chasing after the fact.
Let‘s examine another example…
S&P 500 Futures 4-Hour Chart
In this 4-hour chart of the E-mini S&P 500 futures, we see an established bullish structure most the session with higher highs and higher lows following an overnight swing low.
However, around midday, we get a notable change of character signal as price pulls back below the prior upswing low. This CHOCH suggests the uptrend may be losing conviction.
Sure enough, in the hours after CHOCH develops, sellers take full control with a series of lower highs and lower lows confirming a bearish structure has taken hold. Identifying this transition early on again gives an advantage to capitalize.
The key takeaway is that no move cascades indefinitely. Utilizing structure shifts like BOS and CHOCH can alert you to trend exhaustion before the masses catch on.
Let’s discuss strategies to apply these concepts in real-time…
Trading Tactics to Incorporate Structure Analysis
While seeing historical examples is useful, let’s outline some actual trading tactics you can adopt that leverage BOS and CHOCH signals as opportunities arise.
Using BOS for Early Reversal Warnings
In a persistent uptrend or downtrend, remain patient for a valid break of structure to indicate exhaustion. Require a clear 1-2 bar break closing beyond the pertinent swing high/low to qualify.
Once a BOS triggers, this warns a pullback or potential reversal may materialize. But rather than immediately flipping direction, use BOS to tighten stops to lock profits or enter a shorter-term fade looking for mean reversion.
Essentially, BOS marks potential trend inflection points. Monitor additional signals like CHOCH to confirm reversals before assuming the prevailing trend fully aborted.
Turning CHOCH Into Opportunity
Treat clear change of character events after initial structure breaks as high conviction signals a significant move is brewing.
These trade setups benefit from defined risk points with tight stops. For example, after CHOCH forms in a downtrend with a higher low, enter longs on a break of short-term resistance with stops under the swing low.
Set profit targets based on the height of the most recent trading range or at logical resistance levels. Then trail stops to lock gains once the move extends.
Combining Structure With Other Indicators
While powerfully on their own, BOS and CHOCH become even more potent when combined with traditional indicators:
-
Volume – Seek extra conviction on breaks with spikes in volume for added assurance. Low volume structure breaks are less reliable.
-
Moving Averages – Use crosses of key MAs to confirm BOS and CHOCH. For example, wait for an EMA cross and close above it after CHOCH forms before going long.
-
Momentum Oscillators – Seek bullish/bearish divergences out of overbought/oversold zones matching structure shifts. These add credibility to reversal signals.
-
Patterns – Finally, utilize patterns for extra context. Triangle consolidations that resolve with BOS and bullish reversals aligning with CHOCH provide higher probability setups.
Factor multiple indicators into decisions, but always remember the hard BOS and CHOCH signals hold priority.
Key Takeaways from Professional Trader
While more examples and tactics could be provided, let’s recap the major lessons:
-
Structure over patterns – Key breaks and momentum shifts offer earlier turn warnings than classical chart patterns that often lag major moves.
-
Objectivity – Unlike subjective pattern analysis, structure adheres strictly to swing points and closes. No interpretation required.
-
Early clues – Properly identifying breaks of structure and changes of character provide an early edge to capitalize before pullbacks mature.
-
Combining signals – Use BOS and CHOCH in conjunction with volume, indicators, and patterns for the highest probability setups.
-
Active adjustment – Let structure guide next decisions rather than rigidly adhering to bias. Continually assess conditions based on the progression of highs and lows.
I hope these insights provide a strategic edge by integrating market structure analysis into your process. Keep striving to master reading price charts and practice locating exact moments when trends evolve. Detecting and capturing these inflections early is what makes long-term winners.
Please reach out with any other questions!