Change of character

A trend is a sequence of swings. A downtrend makes lower highs and lower lows, an uptrend makes higher highs and higher lows. This sequence is called market structure.

While a downtrend is healthy, every bounce stops below the previous high. A change of character is the moment this stops being true: a candle closes above the most recent lower high. The term comes from smart money concepts. The older reading is the same one Dow theory uses – a trend holds until its last reaction point is broken.

• Bullish CHoCH – in a downtrend a candle closes above the most recent lower high. Sellers failed to defend the level that kept the downtrend intact.
• Bearish CHoCH – in an uptrend a candle closes below the most recent higher low. Buyers failed to defend the level the last rally started from.
• The level that matters is the last swing that led to a new extreme: the lower high before the latest lower low, or the higher low before the latest higher high.

Both are closes beyond a swing point. The difference is direction. A break of structure (BOS) goes with the trend: a close below the previous swing low in a downtrend, above the previous swing high in an uptrend. A CHoCH goes against it.

BOS says the trend continues. CHoCH says it may be ending. After a bullish CHoCH the next thing traders look for is a higher low and then a bullish BOS – a close above the high that the CHoCH move made. Only then is the new trend treated as confirmed.

On Charts the Market Structure (BOS and CHoCH) indicator in the Smart Money group labels both kinds of break. Smart Money indicators are included in Plus and Premium.

• Mark swing highs and swing lows with one fixed rule, for example at least two candles on each side.
• Name the trend from the sequence of swings, then mark one level: the last lower high in a downtrend or the last higher low in an uptrend.
• Wait for a candle to close beyond that level. A wick through it that closes back is closer to a liquidity sweep than to a change of character.
• Give more weight to a break made by a large candle on a higher timeframe than to a close just past the level on a 1-minute chart.

A CHoCH is not an entry on its own. Most methods wait for the pullback that follows it.

• Direction – with the break: longs after a bullish CHoCH, shorts after a bearish one.
• Entry – on the first pullback. Common areas are the broken level itself, an order block or a fair value gap left by the move that made the break.
• Stop – beyond the extreme that the reversal started from: below the last low for longs, above the last high for shorts.
• Target – the next swing in the old trend, for example the previous lower high above the broken one, then liquidity beyond it.
• Context – a CHoCH after a sweep of an obvious high or low, or at a higher-timeframe level, is given more weight than one in the middle of a range.

Structure exists on every timeframe, so a change of character on the 5-minute chart is often only a pullback on the 4-hour chart. A common approach is to take direction from the higher timeframe, wait for price to reach a level there, and use a CHoCH on a lower timeframe as the trigger. Replay mode lets you step through history and check how your swing rule would have marked each break.

• Treating the first CHoCH as a new trend – many are deeper pullbacks, and the old trend resumes.
• Using the wrong swing – a break of a minor swing inside the last leg is not a break of the level that holds the trend.
• Counting a wick as a break – most traders require a close beyond the level.
• Entering on the breakout candle – the entry is far from the stop, and a pullback often follows.