Market structure: BOS, CHoCH and Fair Value Gaps

Reading market structure

Price does not move randomly. In an uptrend, price creates Higher Highs (HH) and Higher Lows (HL). In a downtrend, it creates Lower Highs (LH) and Lower Lows (LL). Understanding this structure is the foundation of price action and Smart Money Concepts (SMC).

Break of Structure (BOS)

A BOS happens when price breaks beyond the previous swing high or low in the direction of the current trend. It confirms the trend is continuing.

In an uptrend: price makes HL1, then rallies. When it breaks above the previous HH, that is a BOS. This confirms buyers are still in control and the uptrend continues. BOS entries look for pullbacks after the BOS to trade continuation.

Change of Character (CHoCH)

A CHoCH happens when price breaks the structure in the opposite direction — suggesting the trend may be reversing.

In an uptrend: after making HH2, price pulls back to HL2. If the next move breaks below HL2 (makes a new lower low), the market structure has shifted. This is a CHoCH — a warning that sellers may be taking over. It does not guarantee reversal, but it changes the bias from bullish to neutral or bearish.

BOS vs CHoCH in one sentence: BOS = trend continues, CHoCH = trend may be ending.

Fair Value Gap (FVG)

A Fair Value Gap is an imbalance in price created by a strong impulse move. It appears as a three-candle sequence where the middle candle moves so aggressively that it leaves a gap between candle one's high and candle three's low.

The shaded zone between C1 high and C3 low is the FVG. Price often returns to fill this gap because market participants who missed the original move look to enter at those prices.

How to use these concepts together

A common SMC-style approach:

Important cautions

These concepts improve context but do not guarantee outcomes. Not every CHoCH leads to a reversal. Not every FVG gets filled. Use them as one layer of analysis alongside support and resistance, risk management, and session timing.