In the today's post, we will discuss one of the most crucial concepts in SMC - Change of Character.
Change of Character relates to market trend analysis.
In order to understand its meaning properly, first, we will discuss how Smart Money traders execute trend analysis.
🔘Smart Money Traders apply price action for the identification of the direction of the market.
They believe that the trend is bullish,
if the price forms at least 2 bullish impulse with 2 consequent higher highs and a higher low between them.
The market trend is considered to be bearish,
if the market forms at least 2 bearish impulses with 2 consequent lower lows and a lower high between them.
Here is how the trend analysis looks in practice.
One perceives the price action as the set of impulse and retracement legs.
According to the rules described above, USDCAD is trading in a bullish trend because the pair set 2 higher lows and 2 higher highs.
🔘Of course, trends do not last forever.
A skill of the identification of the market reversal is a key to substantial profits in trading.
Change of Character will help you quite accurately identify a bullish and bearish trend violation.
📉In a bearish trend, the main focus is the level of the last lower high.
While the market is trading below or on that, the trend remains bearish.
However, its bullish violation is a very important bullish signal,
it is called a Change of Character, and it signifies a confirmed violation of a bearish trend.
In a bearish trend, CHoCH is a very powerful bullish pattern.
Take a look, how accurate CHoCH indicated the trend reversal on Gold.
After a massive selloff, a bullish breakout of the level of the last lower high confirmed the initiation of a strong bullish wave.
📈In a bullish trend, the main point of interest is the level of the last higher low. While the price is trading above that or on that, the trend remains bullish.
A bearish violation of the last higher low level signifies the violation of a current bullish trend. It is called a Change of Character, and it is a very accurate bearish pattern.
Take a look at the example on Dollar Index below.
In a bullish trend, bearish violation of the last higher low level
quite accurately predicted a coming bearish reversal.
Change of Character is one of the simplest, yet accurate SMC patterns that you should know.
First, learn to properly execute the price action analysis and identify HH, HL, LL, LH and then CHoCH will be your main tool for the identification of the trend reversal.
