Explaining change in character (CHoCH)
The CHoCH indicator (change in market character) indicates a change in the current market structure, suggesting a potential reversal of the current trend or a loss of momentum. A bullish CHoCH indicator indicates that the current market structure will shift from bearish to bullish, leading to a price increase. On the other hand, a bearish CHoCH indicator indicates that the current market structure will shift from bullish to bearish, leading to a price decrease. The CHoCH indicator is not as strong an indicator of trend reversal as the CHoCH+ indicator, but it still provides useful insights into the future directional momentum of the price.
How to identify a change in character (CHoCH)
A change in character of trading (CHoCH) occurs when there is a failure of a break of structure (BOS). This failure indicates a shift in the flow of orders, suggesting a reversal in the direction of the asset.
Bullish CHoCH
Bullish CHoCH forms 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
CHoCH forms downward when a high (H) occurs, followed by a higher low (HL), then a higher high (HH), and finally, a lower low (LL).
Trading using CHoCH
The CHoCH indicator is interpreted as an entry or exit point for a position. The CHoCH indicator signals a change in market direction: from bullish to bearish, or from bearish to bullish. This means traders can use the CHoCH indicator as an entry or exit point. Traders in bullish positions can use a bearish CHoCH indicator to exit their buy position; similarly, traders in short positions can use a bullish CHoCH indicator to cover their positions and buy.
A common strategy using ChoCh
After the CHoCH pattern forms, the market direction changes, and the trader may move toward a certain direction. For example, if a bearish CHoCH pattern is formed, the trader can start looking for short selling opportunities. It is best to enter trend pullbacks in pivotal market areas, such as a bearish order block (OB), supply areas, or resistance areas. When the price returns to these areas after a bearish CHoCH pattern, you can open a short position, expecting sellers to be more aggressive as they were previously when these areas formed. When a CHoCH pattern enters a bearish order block, it is expected that the price will collapse with the execution of sell orders that formed the bearish order block.
The theory behind CHoCH
CHoCH occurs when there is a break of structure (BOS). For bullish BOS, this happens when a lower low (LL) is formed, while for bearish BOS, it occurs when a higher high (HH) is formed. BOS indicates that the flow of orders is still strong for the current trend. A bullish BOS means there are more buyers than sellers at the current high prices. The higher low (HL) of bullish BOS is a demand area: the price dropped to that area and then rose again, indicating there are buyers waiting at that price. When the price drops below the previous higher low (HL), it means there are no longer buyers waiting at that price, indicating that something has changed in the market and that the asset is no longer desirable at that high price. This CHoCH for the asset indicates a directional change in the price trend.
What is the difference between CHoCH and CHoCH+?
A change in price character (CHoCH) occurs when the BOS indicator fails, and price movements fail to reach a higher low (HL) or a lower high (LH). A change in price character (CHoCH+) occurs when the formation of a higher high (HH) and a higher low (HL) fails, or when the formation of a lower low (LL) and a lower high (LH) fails.
Why is this called a change in character?
It is called a "change in market character" (CHoCH) because the nature of the market structure has changed. This change occurs when a previous market structure break (BOS) forms but fails to re-form: this change, which is the failure of the market structure break to form, indicates a change in market structure.
What is the best time frame for CHoCH?
Character change indicators (CHoCH) are typically used on daily time frames, and can also be used on longer daily time frames, such as 30 minutes, to see larger shifts in direction. CHoCH can also be used on shorter time frames like 5 minutes or 15 minutes for a scalping style.
