OptiNod Academy

Market Structure: Reading Trends with BOS and CHoCH

The prior low, or higher low (HL), determines whether a trend is still intact. A break above the prior high (BOS) confirms trend continuation, while a break below the prior low (CHoCH) is the first sign of a reversal.

> The prior higher low (HL) decides how long an uptrend will continue. However high a new high reaches, the moment that low breaks (CHoCH) is the first warning that the trend may be turning.

In earlier articles, we covered support and resistance, and supply and demand zones. Now we will look at market structure, which connects those zones into a broader framework. Market structure is the sequence of highs and lows that price creates.

An uptrend is a sequence of higher highs and higher lows. A downtrend is the opposite: lower highs and lower lows. When we say a trend is continuing, we mean that this sequence remains intact.

Most traders feel reassured when price makes a new high, and they get nervous when price pulls back a little. But a new high or a short correction alone does not tell you whether the trend is intact or finished.

The level that defines trend continuation is the prior low. In an uptrend, if price holds the prior low and rises again, the trend remains intact. If that low breaks on a closing basis, that is the first real signal of a possible reversal.

An uptrend sequence of higher highs and higher lows, where the prior low defines continuation

A trend is a sequence of highs and lows

A trend is a sequence of multiple highs and lows building in one direction. A single candle or one new high falls short of that. To read a trend, look at the swing highs and swing lows where price actually turned. A single candle on its own does not define the direction.

In an uptrend, lows rise because buyers step back in before price even reaches the prior high. When that buying pressure pushes price above the prior high, the highs rise as well. As long as both are happening, the trend is still continuing. If either stops, especially if lows stop rising, you should start questioning the trend. If price makes a new high but the next low does not rise with it, the advance is losing strength.

Define swing highs and lows objectively

If you draw swings by eye, you end up fitting the structure to the chart after the fact. That is why you need to define swings in advance. A common method is to use a fixed number of candles on each side. If a high has two or three lower highs on both the left and right, you mark it as a swing high. Swing lows are defined the same way.

After seeing the full chart, you can always pick some small low and call it important. But that is hindsight selection. If you set a rule in advance, such as the number of candles on each side, you will identify the same lows in the same way in real time.

A fixed rule also reduces the chance that different traders draw completely different structures on the same chart. More candles on each side reveal the larger structure. Fewer candles reveal a smaller structure. Choose a setting that matches your holding period, then use it consistently.

How a swing high is fixed objectively by requiring lower highs on both sides

BOS and CHoCH depend on which point breaks

The meaning of a signal changes completely depending on which structural point price breaks.

BOS (Break of Structure): In an uptrend, this occurs when price closes above the prior swing high. The high has moved one step higher, confirming that the trend is continuing.
CHoCH (Change of Character): In an uptrend, this occurs when price closes below the prior swing low (HL). The sequence of higher lows has broken for the first time, giving the first signal that the character of the trend is starting to change.

Not every decline means the same thing. A pullback that stalls before reaching the prior low is a normal step toward a possible BOS. A decline that closes below the prior low is a CHoCH. You need to know which point price touched or broke to tell whether the move is a normal correction within the trend or a warning that the trend is weakening.

In a downtrend, the relationship is reversed. A close below the prior swing low confirms bearish continuation (BOS). A close above the prior swing high (LH) is the first reversal signal in the downtrend (CHoCH). In any trend, the point that confirms continuation and the point that warns of reversal sit on opposite sides of the structure.

Whether it is BOS or CHoCH, the standard is the close. A brief wick through the prior low is different from a candle closing below it. Do not fully trust a break until it is confirmed by the close.

The low decides where the trend ends

BTC in October 2023 is a good example of BOS. Throughout the summer, BTC kept running into resistance near $31,800. Then on October 23-24, price closed above that high and rallied to $35,000. This BOS above the prior structural high confirmed the start of a new uptrend. BTC then continued making higher highs and higher lows, eventually reaching $73,777 in March 2024.

CHoCH appears at the opposite end. In November 2021, BTC made an all-time high at $69,000. Until then, its lows had been rising near $57,800. But after the all-time high, price formed a lower high at $66,400, then closed below the $57,800 low in late November.

That CHoCH was the first signal that the uptrend had ended. BTC then entered a downtrend, making lower lows and lower highs into January 2022, when it reached $32,900.

This distinction is useful in real trading for a clear reason. If you are long in an uptrend, you can hold as long as the prior low is defended, then exit when that low breaks on a closing basis as a CHoCH. The trend structure itself defines the invalidation point, which connects directly to the stop placement covered in the previous article.

CHoCH is only the first reversal signal

You should not enter immediately in the opposite direction just because a CHoCH appears. CHoCH is the first warning that the trend may be changing. It does not confirm a full reversal. If price breaks a low once, then quickly recovers and makes a new high, the break was only a temporary shakeout. If you flip your position on every CHoCH, you will keep exiting trend-following positions during normal pullbacks, entering the opposite side, and getting stopped out again.

To confirm a reversal, new structure in the opposite direction must follow the CHoCH. In a shift from uptrend to downtrend, price must break the low, form a lower high, and then make a lower low. CHoCH is a signal to pay closer attention. Actual entries should come after the following structure confirms.

Structure differs by timeframe

A CHoCH on a smaller timeframe is often just a normal correction on a higher timeframe. If the weekly chart is in an uptrend and the 5-minute chart breaks one low, it is likely just a small pullback inside the weekly uptrend.

For example, if the daily chart is in an uptrend, a CHoCH on the 4-hour chart is usually a pullback within that trend. It can even become the starting point for finding a better long entry. Reversal signals on smaller timeframes only become meaningful when read within the direction of the higher timeframe.

That is why structure should always be read in two steps. Use the higher timeframe to define trend direction, then use the lower timeframe to narrow the entry. Follow BOS signals that align with the higher-timeframe trend. Do not use small CHoCH signals against the higher-timeframe trend as standalone entries. The strongest setups appear when both timeframes point in the same direction.

A lower-timeframe reversal signal sitting as a pullback inside a higher-timeframe uptrend

Trade with the structure

The basic structure trade is to follow a BOS after a pullback holds the prior low, in the same direction as the higher-timeframe trend.

[ ] Entry condition: The weekly chart is in an uptrend, with highs and lows rising together. On the daily chart, price pulls back while holding the prior low (HL), then closes above the prior high (BOS).
[ ] Entry: Buy at the close of the breakout candle, or on a pullback toward the prior high shortly after the breakout.
[ ] Stop: Place the stop 1 ATR below the low of that pullback (HL).
[ ] Invalidation: If price closes below that low (CHoCH), treat the trend as compromised and exit.

How BOS confirms continuation while CHoCH warns of reversal within one sequence

Reading structure ultimately comes down to one question: are the lows rising or falling? Once that line is clear, you are less likely to get excited by every new high or scared out by every short pullback.