SMC — Trading Hub 3.0 · 2023-08-25

Trading Hub 3.0 (Part 2): Identifying CHoCH, BOS, IDM – SMC

In this part, we will learn about CHoCH, BOS and Inducement in the Smart Money Concept (SMC) method.

First we need to understand what Impulsive and Corrective moves are in terms of structure.

For readers who want to watch the video:

Video on how to mark the SMC structure map

What are Impulse and Correction in terms of structure?

When market momentum is bullish and continues to go up in the upside direction it is called an Impulse move, when price breaks through the pullback it is called a Correction move.

The same applies when market momentum is bearish. When the market is moving in the downside direction and an upside pullback appears, after which the market continues to push in the continuing downside direction, these movements are called impulse, correction and continuation respectively.

Let us look at the following example:

Example of impulse and correction in terms of structure

In the example above, as we learned in Part 1, moves A; C; E; G; I are called impulses in terms of candles, candles B; D; H are corrections in terms of candles. Move F is called a large correction in terms of candles.

However in this part we will call the move from A up to E an impulse in terms of structure. And move F is called a correction in terms of structure.

So why are candles B and D not called corrections in terms of structure but only corrections in terms of candles? According to SMC, a correction in terms of structure appears when price breaks through the first pullback.

According to the example above, move F swept through the low of candle D and then reversed, so F is called a correction in terms of structure.

If move F did not sweep through the low of candle D, F would simply be a correction in terms of candles, and the whole segment of movement from A to I would only be a Single leg move.

The same happens when market momentum is bearish.

What is Inducement (IDM) in SMC?

When market momentum is bullish and continues to push in the upside direction, the first pullback that is swept through is called IDM, so IDM always lies on the left side of the structure. According to the example above, the low of candle D is called IDM.

What is IDM in SMC

If move F does not break through the low of candle D, it is not called inducement (whether the candle closes above or below does not matter, the candle color does not matter).

The same happens when market momentum is bearish.

What is Break of Structure (BOS) in SMC?

When the market is bullish, price breaks through the previous major high and the candle closes above it, this is called BOS. Similarly, when the market is bearish and price breaks through the previous major low and a candle closes below it, it is called BOS. If the candle only wicks through rather than closing above the major high or below the major low, that action is considered a liquidity sweep and we should think in terms of trading in the opposite direction.

In the example above, move I goes beyond the high of F and a candle closes above it; we call this BOS.

Whether the market is rising or falling does not matter; in both cases a full candle close is needed to confirm BOS. If price only sweeps through that structure it counts as a Liquidity sweep / Stop hunt. Now I will show you some cases so you can identify valid and invalid BOS.

Valid and invalid BOS in bullish conditions Valid and invalid BOS in bearish conditions

What are higher high and higher low?

In bullish market conditions, a Higher high is confirmed when price sweeps through IDM, and a higher low is confirmed when price goes beyond the major high creating BOS. The same with bearish: a Lower low is confirmed when price sweeps through IDM, and a lower high is confirmed when price goes beyond the major low creating BOS.

In the example above, the high of move F is called a higher high because F sweeps through IDM, and the low of F is called a higher low because I goes beyond the high of F and a candle closes above it.

What is Change of Character (CHoCH) in SMC?

Change of Character is the change in the character of price from up to down or from down to up. There will be 2 cases for identifying CHoCH as follows:

• Case 1: When the market is in an uptrend and has not yet touched an HTF POI or Supply zone, if price reverses and cuts through the higher low and a candle closes below it, the higher low becomes CHoCH. The first pullback is still IDM. Similarly when the market is falling.

CHoCH without touching POI (Bear to Bull) CHoCH without touching POI (Bull to Bear) CHoCH without touching POI

• Case 2: When the market is in an uptrend and price touches an HTF POI or Supply zone, if price reverses and cuts through the first pullback and a candle closes below it, the low of the pullback becomes CHoCH. At this point we do not call the first pullback IDM but call it CHoCH. However, if we look for a buy entry, we should look for IDM on the LTF (lower time frame) to enter the trade (see the later parts). Similarly when the market is falling.

CHoCH touching POI bear to bull CHoCH touching POI bull to bear CHoCH touching POI

In the case where a candle only sweeps liquidity and wicks back, we do not yet count it as CHoCH. However, at the moment the second wick is exceeded, the first wick becomes CHoCH.

CHoCH with candle wicks

So we have gone through all the concepts of CHoCH, BOS, IDM. These are all important factors in determining the market structure map of the SMC Trading Hub 3.0 method.

You need to understand each factor carefully and calmly, because when you clearly understand the structure map, the rest will be much easier to understand. Below are real examples of identifying the structure map.

Specific examples:

Bullish structure map Bearish structure map

Example of CHoCH touching a POI

Note: Change of Character will become more reliable if it touches a demand zone or supply zone (POI).

Bonus: Fake CHoCH

After breaking structure to create BOS, the first pullback broken on the LTF has a high probability of being a Fake CHoCH. CHoCHs appearing after a Fake CHoCH are likely to be genuine CHoCHs. Fake CHoCH will be discussed in more detail in Part 14 of this series of articles.

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