Everything To Know About Choch ( Change Of Character )

Summary

This lesson dives deep into three types of change of character in trading: basic, internal-to-internal, and external-to-external. It explains how price trends and structures shift, outlining how to spot these changes through examples. The focus is on recognizing key patterns, like when lower lows and highs reverse into higher highs, and how traders can adjust their strategies accordingly. By understanding these transitions, traders can identify potential entries, whether using extreme points, hidden blocks, or fair value gaps, helping them build strategies based on risk tolerance and market behavior.

Takeaways

• 😀 Basic Change of Character (CoC) occurs when price breaks a lower high in a downtrend, signaling a potential trend reversal.
• 😀 Internal to Internal CoC happens within a range, where price reacts to support or resistance, leading to a trend reversal after a structure break.
• 😀 External to External CoC is the most powerful, as it traps both buyers and sellers by first breaking structure, retracing, and then reversing the trend.
• 😀 Break of structure indicates a shift in market direction, and a retracement often follows before a trend continuation or reversal.
• 😀 Internal liquidity refers to orders within a range that could be used by price to initiate a trend change or reversal.
• 😀 When the price breaks structure in one direction and retraces to a previous level, it can trap both retail and smart money traders.
• 😀 Traders can enter at different points of interest, including extremes, hidden blocks, and fair value gaps, based on their risk tolerance.
• 😀 A smart money trader may focus on order blocks and liquidity imbalances to anticipate large price moves, while retail traders rely on traditional support/resistance levels.
• 😀 It’s important for traders to backtest their strategies to find the most effective entry points and stop loss placements.
• 😀 Depending on risk preference, traders may choose to enter trades at extreme levels (higher risk), hidden blocks (moderate risk), or fair value gaps (lower risk).

Q & A

What is a basic change of character in trading?

A basic change of character occurs when price breaks a lower high in a downtrend, signaling a potential reversal. After this break, price often retraces to internal liquidity, like a demand order block, before starting a new bullish trend.

How can you identify a basic change of character in a downtrend?

In a downtrend, you will notice lower lows and lower highs. When price forms a higher high instead of continuing the lower highs pattern, it's a sign of a basic change of character.

What role does internal liquidity play in the basic change of character?

Internal liquidity refers to areas within the previous range where price can retrace before reversing. In a basic change of character, price often returns to look for internal liquidity, such as demand order blocks, to continue the trend reversal.

What is the difference between a basic change of character and an internal to internal change of character?

A basic change of character occurs when price breaks structure and then retraces to internal liquidity before reversing. In contrast, an internal to internal change of character happens when price remains within an established range, showing resistance at the extreme, and then reverses without breaking structure.

How can you spot an internal to internal change of character?

You can spot an internal to internal change when price stays within a range, reacting to demand or supply zones at the range extremes. When price faces rejection within this range and fails to break structure, it signals a potential shift in trend.

Why is the external to external change of character considered the most powerful?

The external to external change of character is the most powerful because it traps both buyers and sellers. Price first breaks structure to trap one side, then reverses to trap the opposite side, before fully reversing the trend, leading to a higher probability trade setup.

What does an external to external change of character look like on the chart?

In an external to external change, price first breaks structure, trapping the buyers. Then, price reverses, taking out the sellers. This creates a situation where both sides are trapped, and price can move in the opposite direction of the initial break.

How do retail traders and smart money traders get trapped during an external to external change?

Retail traders may take long positions after a breakout, expecting price to continue, while smart money traders may enter on the basic change of character expecting the trend to reverse. In an external to external change, both sides get trapped as price moves against their positions, taking out their stop losses.

What are the three types of entries you should consider after a change of character?

The three types of entries are: 1) Hidden block entries, which are near the last order block prior to price movement; 2) Fair value gap entries, which occur near the 50% retracement level; and 3) Extreme entries, which happen when price reaches the extreme level of a range.

How should a trader choose which type of entry to focus on after a change of character?

A trader should choose their entry type based on their risk tolerance and strategy. Extreme entries are the safest with lower risk, while hidden block and fair value gap entries may offer higher risk but can provide more opportunities. Consistency in trading the same type of entry is key.