The foundation for reading market direction in SMC (Smart Money Concepts) lies in the structural concepts of BOS, ChoCh, and MSS. If you search for order blocks or FVGs with a vague understanding of these, you will keep taking trades in the wrong direction. In this article, our research institute breaks down the definitions and identification methods for BOS, ChoCh, and MSS, along with key considerations for verification.
Definitions / How They Work
Markets do not move in a straight line — they form waves of highs and lows as they progress. An uptrend consists of higher highs (HH) and higher lows (HL); a downtrend consists of lower highs (LH) and lower lows (LL). Structural analysis examines how these waves are updated.
BOS (Break of Structure) is the sign that a trend-direction recent swing high (or low) has been broken on a body-close basis, confirming that the trend is continuing. ChoCh (Change of Character), on the other hand, refers to the moment a pullback low (or rally high) against the trend is broken, signaling the first indication of a potential reversal. MSS (Market Structure Shift) is an ICT term nearly synonymous with ChoCh, but specifically refers to a clear shift accompanied by strong momentum (Displacement) — typically with an FVG.
In short, it helps to remember: BOS = continuation, ChoCh/MSS = the entry point of a reversal. It is also worth noting that order blocks and FVGs that tend to hold up are frequently left at the origin where structure breaks down.
Examples / Identification Steps
Using a reversal from an uptrend as an example, here are the identification steps.
| Step | What to Confirm |
|---|---|
| 1. Grasp the current structure | Confirm that higher highs and higher lows are continuing (uptrend) |
| 2. Identify the most recent pullback low | Mark the most recent HL (pullback low) that serves as the “lifeline” of the trend |
| 3. Confirm ChoCh | If price closes below that pullback low on a body basis, treat it as the first sign of a reversal (ChoCh) |
| 4. Confirm Displacement | If the break is accompanied by strong momentum with an FVG, confidence in the MSS (market structure shift) increases |
| 5. Confirm continuation with BOS | After the reversal, if a BOS updating a lower low (LL) appears, judge the downtrend as continuing |
As an example, suppose USD/JPY has been rising with higher highs and higher lows. If the most recent pullback low at 150.50 is broken decisively with a strong body close (a bearish candle for a downside break), ChoCh is confirmed. If an FVG forms at that point, it qualifies as a strong MSS; if price subsequently breaks below the prior low at 150.20, it can be read as a BOS continuation into a downtrend. When only the wick breaks below and the body closes back above, consider the possibility of a liquidity sweep rather than a structural shift.
The conclusion changes depending on which timeframe’s structure you use as your reference. Rather than relying on intuition, collect your own data and verify it. The article on metrics to check when backtesting an EA is also a useful reference for the verification mindset.
Common Pitfalls for Beginners
- Mistaking a wick break for a BOS: A structural update is fundamentally a body-close update. A wick-only break frequently ends as a liquidity sweep and is a classic false signal.
- Inconsistency in which swing high/low to use as the reference: Mixing up fine internal structure with larger external structure causes BOS and ChoCh judgments to shift every time. Fix the size of the wave you use as your reference.
- Jumping in at ChoCh: ChoCh is a “sign,” not a confirmed reversal. Entering without waiting for price to reach a higher-timeframe POI or for a retest leaves you exposed to being caught by a continuation BOS.
- Ignoring the higher-timeframe direction: Trading counter-trend based solely on a lower-timeframe ChoCh, against the higher-timeframe trend, tends to produce shallow reactions that quickly fade.
- Increasing position size without backtesting: Scaling up lot size right after learning structure is risky. First solidify each piece of evidence step by step through the SMC learning steps.
FX AI Research Institute’s View
Our institute positions BOS and ChoCh as a “filter for determining directional bias.” Entry decisions are not made on structure alone; edge is measured by the confluence with liquidity, OBs, and FVGs. Because structural judgment is prone to inconsistency when left to discretion, rule-based backtesting is the appropriate approach. Our institute is currently advancing verification of EAs that incorporate SMC logic (currently in the development and verification stage — no confirmed results yet). The verification process and methodology comparisons are being published progressively in our Research Library.
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This article is for educational and informational purposes only and does not recommend any specific trading method or trade. FX trading involves leverage and losses may exceed the amount of deposited margin. Make all final investment decisions at your own risk, and review each company’s risk disclosures and this site’s disclaimer before trading.