In Inner Circle Trader (ICT) methodology, Change of Character (CHOCH) refers to a key shift in the market’s behavior, often signaling the end of one trend and the beginning of another.
This concept is crucial for traders looking to catch reversals early by identifying shifts in price dynamics before a full Break of Structure (BOS) occurs.
While Break of Structure focuses on a definitive trend reversal by breaking significant highs or lows, CHOCH is more subtle.
It typically happens when the market starts to show signs of weakness in the prevailing trend, providing traders with an early warning that a reversal may be imminent.
1. What is CHOCH in ICT?
In a trending market, CHOCH occurs when the market moves in the opposite direction of the prevailing trend and breaks a smaller or intermediate swing point (not necessarily the major structure level).
It’s an early indication of a possible market structure shift (MSS), signaling that the trend might soon change.
- In an uptrend, the price action forms higher highs (HH) and higher lows (HL).A CHOCH would occur when price breaks below a recent higher low, suggesting potential weakness in the trend.
- In a downtrend, the price forms lower highs (LH) and lower lows (LL). A CHOCH happens when price breaks above a recent lower high, indicating a shift in momentum.
2. Key Difference Between CHOCH and BOS:
- CHOCH indicates an early signal of a trend reversal.
- BOS confirms the trend reversal once a key structural level is broken.
3. How to Identify CHOCH in an Uptrend in ICT
In an uptrend, CHOCH occurs when price forms a higher low (HL), but instead of continuing upwards, the price reverses and breaks below this minor higher low, showing weakness in the bullish trend.
1. Example:
- The price of GBP/USD is moving upwards, forming higher highs (HH) and higher lows (HL).
- The price forms a new higher low (HL) at 1.3500 and a higher high (HH) at 1.3600.
- Suddenly, price retraces and breaks below the recent higher low at 1.3500 without breaking the major swing low.
- This break signals a CHOCH, alerting traders to the fact that the uptrend may be losing momentum and could reverse soon.
At this point, ICT traders might anticipate the shift and begin looking for sell opportunities, but confirmation of a BOS is still needed before fully committing.
4. How to Identify CHOCH in a Downtrend in ICT
In a downtrend, CHOCH happens when price breaks above a lower high (LH) without yet violating the major swing structure, indicating weakness in the bearish trend and a potential for reversal.
1. Example:
- The price of Crude Oil is in a downtrend, forming lower highs (LH) and lower lows (LL).
- Price forms a lower high (LH) at $75 and a lower low (LL) at $70.
- Suddenly, price rallies and breaks above $75 (a lower high), creating a CHOCH.
- This signals that the bearish trend may be weakening and that a potential bullish reversal could be on the horizon.
Here, ICT traders may start looking for long positions but await further validation from a BOS before entering aggressively.
5. CHOCH as a Precursor to Market Structure Shift (MSS) in ICT
CHOCH is often seen as the precursor to a full Market Structure Shift (MSS). While CHOCH alerts traders to a change in momentum, an MSS requires more evidence that the trend has fully shifted. Usually, a CHOCH is followed by a Break of Structure (BOS), confirming the trend reversal.
1. Example:
Imagine the price of Tesla (TSLA) is in a strong uptrend, making higher highs and higher lows. The price fails to break the recent higher high and instead breaks below a recent higher low (HL), creating a CHOCH. If the price then breaks a major swing higher low (HL), this would complete the BOS, confirming the Market Structure Shift from an uptrend to a downtrend.
6. Different Types of CHOCH in ICT
- Major CHOCH: A break of a significant swing point in the trend, indicating a strong possibility of a reversal.
- Minor CHOCH: A break of a smaller, intermediate swing point that shows early signs of a trend shift but requires further confirmation.
1. Example of Major CHOCH:
- In a strong uptrend on the EUR/JPY chart, price breaks below a key higher low on the daily timeframe, indicating a major CHOCH.
- This is a significant sign that the market could be about to reverse.
2. Example of Minor CHOCH:
- On the 1-hour chart, price breaks below a smaller higher low within the uptrend, signaling a Minor CHOCH.
- This hints at a temporary retracement but doesn’t yet confirm a full reversal.
7. Trading CHOCH with ICT Concepts
To trade CHOCH effectively using ICT principles, traders combine it with other concepts like liquidity grabs, order blocks, and time and price theory.
- Liquidity Grab Before CHOCH: Often, institutions may grab liquidity before a CHOCH occurs. For example, price might spike above a higher high to take out stop-loss orders from retail traders before reversing and creating a CHOCH by breaking a higher low.
- Order Blocks: After a CHOCH, price may retrace to an order block before continuing in the direction of the new trend. Order blocks act as support or resistance and are key levels where institutions have placed large buy or sell orders.
- Time and Price Theory: ICT traders use specific times of the day, such as the London Open or New York Open, to predict when a CHOCH is most likely to occur. These are times when institutional trading activity is highest.
8. Examples of CHOCH in Action in ICT
1. EUR/USD – Bullish CHOCH Example
- Price is in a downtrend, making lower highs and lower lows.
- The price fails to create a new lower low and instead rallies to break a lower high on the 4-hour chart.
- This CHOCH signals the downtrend is weakening, and traders prepare for a potential reversal.
2. Bitcoin – Bearish CHOCH Example
- Bitcoin is in an uptrend, forming higher highs and higher lows.
- Price breaks below a recent higher low on the 1-hour chart without violating the major structure.
- This CHOCH indicates that the uptrend is losing steam, and a bearish move could be starting.
9. Conclusion
In the ICT trading framework, Change of Character (CHOCH) is an essential tool for identifying early trend shifts.
By learning to spot CHOCH and combining it with other ICT principles like order blocks and liquidity grabs, traders can gain an edge by positioning themselves ahead of full trend reversals.
Whether in an uptrend or downtrend, CHOCH provides a valuable early warning signal that helps traders prepare for market structure shifts.
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