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You're Trading Break of Structure (BOS) WRONG – Transcript
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- Traders often mark an invalid break of structure when a swing high fails to pull back into the previous high.
- A valid break of structure requires price to pull back inside the previous high and create a higher high.
- An indicator built on Vella charts using Quant looks for a valid pullback that retests a previous high after five minimum bars.
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This here is not a break of structure. And let me show you why this could be killing your trading. A lot of traders would mark this as their break of structure. By doing so, they place their protective low down here. So, as price approaches this protective low, you might look for a long, place your stop loss below it, and target higher prices.
Then, the trade fails and you blow your account. So, let me show you how to fix this. We only consider it a break of structure when price pulls back and then creates a higher high. First, we need a swing high, which we have here. Then, price needs to pull back inside the previous high, making this a valid swing low. In this case, however, this swing high fails to pull back into the previous high. That means this is not a
break of structure, and this is not a valid pullback. So, I can see that this is actually my last break of structure, making this my real protective low. And as you can see, price respects this low and goes on to make a higher high. Okay, this is actually very clever, and I haven't really thought of break of structures in that way. Regardless, this is still a break of structure, but for a strong, valid break of structure, I like
this concept. I like the idea of retesting a previous high and holding that previous high, because that's just market structure 101 when it comes to uptrends and downtrends. Let's just build that, look at the setups, and see if it's actually valuable. So, using Quant inside of Vela charts here, I was able to build a really awesome indicator for identifying this exact setup.
Essentially, what it looks for is a valid pullback, as you can see here, retesting a previous high after a certain amount of minimum bars. Five minimum bars have to occur in that pullback for it to be valid. Now, once a valid pullback occurs, that break of structure technically is invalid until you break that recent high or low, depending on which direction. If we continue forward, you can see we get a very nice push off of that valid pullback. So, from here, I honestly would want you to take a long somewhere
inside that area, stop below the low, and maybe even target a full breakout. In this case, we could go even up to a two to one here. Let's see if we get that breakout. We get a really strong push through that breakout there. Valid pullback reaction makes a valid BOS.
Valid pullback reaction valid BOS continuation. Goodness gracious, these setups are pretty solid. Honestly, this concept for actually validating a trend continuation or even a break of structure is way stronger than I thought it. And this indicator that we built with Quant that I'm using on Vella charts is actually really strong. If you want to try it out for yourself, just comment BOS and I'll send you a link. Or you can open Lux Algo's charting platform called Vella, go up to indicators, and then go to Lux Algo on