Change of Character (CHoCH) Explained
A Change of Character (CHoCH) indicates a change in the current market structure suggesting that the current trend is likely to reverse or lose momentum. A bullish CHoCH indicates that the current market structure will shift from bearish to bullish, leading to an increase in price. A bearish CHoCH indicates that the current market structure will shift from bullish to bearish, leading to a decrease in price. The CHoCH is not as strong an indication of trend reversal as the CHoCH+, but it still provides useful insights into the future directional momentum of the price.
How to locate a Change of Character (CHoCH)
A change of character (CHoCH) is formed when a Break of Structure (BOS) fails to form. This failure signals a shift in the order flow, indicating a reversal of an asset's trend.
Bullish CHoCH
A bullish CHoCH is formed when a low (L) occurs, followed by a lower high (LH), then a lower low (LL), and finally, a higher high that breaks the previous lower high.
Bearish CHoCH
A bearish CHoCH is formed when a high (H) occurs, followed by a higher low (HL), then a higher high (HH), and finally, a lower low (LL).
Trading using a CHoCH
A CHoCH is interpreted as an entry or exit point for a position. A CHoCH signals a directional change in the market trend: bullish to bearish or bearish to bullish. This means that traders can use the CHoCH as an exit or entry point. A trader in a bullish position may use the formation of a bearish CHoCH to exit their long position; similarly, traders who are short may use the formation of a bullish CHoCH to cover their position and go long.
Common Strategy using a ChoCh
After a CHoCH forms, market sentiment has shifted, and a trader can have a trend bias. For example, if a bearish CHoCH forms, a trader can start to look for shorting opportunities. It is best to enter on trend pullbacks into pivotal market areas such as a bearish Order Block (OB), Supply Zones, or a Resistance Area. When the price retraces to these areas following a bearish CHoCH, you can open a short position, expecting sellers to be aggressive like they were previously when these areas were formed. CHoCH enters the bearish OB price is expected to crash as the sell orders that formed the bearish OB are executed.
The Theory Behind CHoCH
A CHoCH occurs when a Break of Structure (BOS) is broken. For a bullish BOS, this occurs when a lower low (LL) is formed, while for a bearish BOS, it is when a higher high (HH) is formed. A BOS indicates that the order flow is still strong for the current trend. A bullish BOS means that there are more buyers than sellers at the current higher prices. The higher low (HL) for a bullish BOS is a demand area: price fell to that area then moved back up, signaling waiting buyers at that price. When the price falls past the previous higher low (HL), it means that there are no longer buyers waiting at that price, signaling that something has changed in the market and that the asset is no longer desirable at that high price. This CHoCH for the asset signals a directional change in trend for the price.
What is the difference between a CHoCH and a CHoCH+?
A Change of Character (CHoCH) is when a BOS fails, and price moves fail to reach a higher low (HL) or a lower high (LH). A Change of Character Plus (CHoCH+) occurs when a higher high (HH) and a higher low (HL) fail to form or when a lower low (LL) and a lower high (LH) fail to form.
Why is it called a Change of Character?
It is called a change of character (CHoCH) because the market structure's 'character' has changed. A change of character occurs when a Break of Structure (BOS) had previously formed but fails to form again: the change that it is the BOS failing to form signals a change in market structure.
What timeframe is best for a CHoCH?
Change of Characters (CHoCH) are typically used on intraday time frames, and can be used on higher intraday time frames such as the 30 minute to see larger trend shifts. CHoCH can also be used on shorter time frames such as the 5 minute or 15 minute for a scalping style.
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