As someone who’s spent years navigating the ups and downs of the trading world, I’ve learned that understanding market structure is key to making informed decisions. One concept that often trips up traders is what happens when the price continues its move after a Break of Structure (BOS) without pulling back to sweep the inducement. In this article, we’ll dive into what inducement after a BOS means and how you can identify new inducement levels to refine your trading strategy.
Why Does Price Sometimes Ignore Inducement After a BOS?
You might have noticed that sometimes, after a BOS, the price doesn’t pull back to grab the inducement created before the break. Instead, it keeps moving in the same direction. This situation raises a few important questions:
- Should we wait for the price to take out the initial inducement before entering a trade?
- Will the market create a new inducement?
- How do we identify this new inducement?
Before we get into answering these, it’s essential to understand what a minor Break of Structure is, as it plays a crucial role in spotting new inducement levels.
What Is a Minor Break of Structure?
In trading, not all breaks of structure are equal. A minor BOS occurs when the price makes a slight shift without changing the overall market trend.
In a Bullish Market:
Imagine the market is moving upward, making higher highs and higher lows. After a major BOS, if the price continues to rise without pulling back to sweep the inducement and forms a new swing high, we need to wait for the price to close above that swing high. This closure signifies a minor BOS. While the price has made a new high, the overall bullish structure remains the same.
In a Bearish Market:
Conversely, in a downtrend, the price makes lower highs and lower lows. After a major BOS, if the price keeps falling without grabbing the inducement and creates a new swing low, we wait for the price to close below that swing low. This action marks a minor BOS in a bearish market. The price has made a new low, but the overall bearish structure hasn’t changed.
Identifying Inducement After a Break of Structure
When the price doesn’t pull back to sweep the initial inducement after a BOS, we need a new approach to find trading opportunities. Waiting for the price to revisit the old inducement might mean missing out on potential trades. Here’s how to identify new inducement levels:
In a Bullish Market:
Since the price is making higher highs, we look for a minor BOS to signal the creation of a new inducement. Once a minor BOS happens, we:
- Mark the Lowest Low and Highest High of the bullish price leg that broke the swing high.
- Identify a Valid Pullback within this bullish price leg. This pullback becomes our new inducement level.
By focusing on the recent price action, we can spot new inducements every time the market moves up without sweeping the previous ones.
In a Bearish Market:
The process is similar but in the opposite direction. When the price continues to make lower lows, we wait for a minor BOS to indicate a new inducement level. After a minor BOS:
- Mark the Highest High and Lowest Low of the bearish price leg that broke the swing low.
- Find a Valid Pullback within this bearish price leg. This pullback serves as the new inducement level.
This method allows us to consistently identify new inducements as the market moves down without revisiting previous ones.
Why Is This Important?
Understanding how to identify new inducement levels after a BOS is crucial for timing your trades. It helps you adapt to the market’s movements and not miss out on opportunities just because the price didn’t pull back to the initial inducement. By recognizing minor BOS and new inducements, you can:
- Stay in Sync with the Market: You’re able to adjust your strategy based on what the market is currently doing.
- Improve Trade Entries: Identifying new inducements can lead to better entry points.
- Enhance Risk Management: By understanding where the new inducement levels are, you can set more accurate stop-loss and take-profit levels.
Final Thoughts
Navigating the market can be challenging, but understanding concepts like inducement after a Break of Structure can give you an edge. Remember, the market doesn’t always do what we expect, so being adaptable is key. Keep learning, stay patient, and use these insights to refine your trading approach.
Frequently Asked Questions (FAQs)
A major BOS indicates a significant change in market structure, such as a new trend beginning when the price breaks through key support or resistance levels. A minor BOS, on the other hand, is a smaller shift where the price makes a new high or low without altering the overall trend. Recognizing the difference helps you understand whether the market is changing direction or just making a temporary move.
The price doesn’t always return to the initial inducement because market momentum can carry it forward. Factors like strong buying or selling pressure, economic news, or market sentiment can push the price in one direction without a pullback. Waiting for a pullback that doesn’t happen can cause you to miss trading opportunities.
A valid pullback is a temporary reversal within a larger trend. To identify one:
Look for small counter-movements against the main trend.
In a bullish trend, a valid pullback would be a brief downward move.
In a bearish trend, it would be a short upward move.
Use technical indicators like Fibonacci retracement levels to spot potential pullback areas.
Trading without waiting for the price to sweep the initial inducement can be riskier because you’re going against the common strategy of waiting for confirmation. However, by identifying new inducement levels after a minor BOS, you can mitigate this risk. It’s important to have a solid understanding of market structure and use proper risk management techniques.
Yes, the concepts of Break of Structure and inducement are applicable across various financial markets, including forex, stocks, commodities, and cryptocurrencies. Market structure analysis is a fundamental aspect of technical analysis and can help traders understand price movements regardless of the market they’re trading in.