A ChoCh in the forex market is an initial shift in orderflow that can sometimes signal a short or even long-term price reversal for an asset, equity, or currency pair. ChoChs are generally considered a reversal pattern that SMC traders use on the higher-time frames for market direction and on the lower-time frames to start looking for trades on the 1-minute.
A “ChoCh” is just short form for “change in character”, and it really just means we’re seeing prices break internal structure (where a minor level or supply or demand zone fails).
Most SMC traders like to use ChoChs on all of the timeframes to get a sense of market direction and to start looking for intraday reversals or reactions to 15m POIs (points of interest).
How To Use ChoChs In Forex
To use a ChoCh, you simply just need to look for a shift in orderflow (the last level of demand or supply failing) on the timeframes that you trade. It should be noted that ChoChs should really only be used as a confluence and shouldn’t be something you rely on solely for getting market direction, or looking for confirmations on the lower time frames.
As illustrated in the diagram above, you can easily identify a change of character by looking for that initial shift in orderflow or break in internal structure where a trend (on the timeframe that you’re on) is potentially starting to change.
Using ChoChs on the 15-minute Timeframe
ChoChs can be a very useful tool both identifying high probability POIs on the 15-minute to trade directly off of (entering on the 15-minute timeframe), and for picking POIs to look for 1-minute confirmation entries on the lower timeframe.
As you’ll see in the diagram above, we have bullish structure and orderflow on the 15-minute that then shifts to bearish orderflow (change of character down) as that last point of demand fails.
The idea is that if price was going to continue to be bullish it would’ve likely respected that zone of demand and continue to violate any supply levels it’s creating as it pulls back.
The only problem with relying solely on ChoChs is that despite breaking the last point of supply or demand (as illustrated in the diagram), price could very well just be sweeping the zone before continuing in the same direction as the already established trend. This presents a danger to those who do not use additional confluences to pick high-probability zones as ChoChs can produce a lot of “false signals” that price is going to reverse.
Using ChoChs on the 1-minute Timeframe For LTF Entries
SMC traders typically go a step further if they trade the 1-minute timeframe by looking for a high probability 15-minute zone using several confluences ranging from supply and demand chains, ChoChs (or shifts in internal structure) where the last point of supply or demand is failing as shown in the 15-minute example above, and by looking for things like liquidity which will be used as inducement, as well as liquidity to target.
Once you’ve identified a good quality 15-minute POI to trade off of and in which you’re expecting a reaction from, you can step down to the 1-minute timeframe and search for entries by looking for a ChoCh (change of character) similar to how you’d look for one on the mid-to-higher time frames.
It should be noted that sometimes looking for a ChoCh alone on the 1-minute just isn’t sufficient enough to justify placing an entry. Again, this is a grossly simplified way of engaging with the market because we’ve left out key components such as structural liquidity, and even multiply supply or demand failures to increase the chances of our trade idea working out.
The Problem With Using ChoChs
The truth of the matter is that ChoChs in isolation, like many SMC concepts, just aren’t all that reliable when used alone. Extreme caution should be used when using ChoChs because they happen very often, and don’t always play out.
In order to trade ChoChs in an effective manner, it’s important to use a stack of confluences to ensure you’ve picked a good POI and that you have a good sense of the market’s direction. Too often we’ll see traders try to trade ChoChs whenever they see them and this can lead to a very poor strike rate and can also lead to poor confidence in your trading as well as poor overall trading performance.
It’s important to ensure you only use ChoChs or “internal breaks in structure” in very specific circumstances and scenarios where you’re looking to take advantage of a reversal in the market.
As you can see in the example above, ChoChs don’t always play out, so be smart and ensure you test using ChoChs with additional confluences before using this concept in your own trading.
How To Use ChoChs As A Confluence
ChoChs are best used as a confluence by looking for them as the last step after you’ve identified a good quality POI (point of interest) by doing a proper top-down analysis of the market and looking for the following confluences:
If I enter at this zone, would it be counter-trend or counter-orderflow?
Is the zone part of a supply or demand chain?
Did this zone sweep liquidity?
Is there clear liquidity between the zone and where price is re-testing the zone (inducement).
Is there a clear change of character, and can I start looking for entries now?
ChoChs In Conclusion
In conclusion, using ChoChs (change of character) in forex is a great way to identify internal market structure breaks and shifts in orderflow, but should be used in only very specific situations to avoid being swept out of your position in a liquidity grab.
At Phantom Trading, we’ve expanded upon this basic concept by looking specifically for supply or demand failures and how price interacts with the zones of supply or demand that are failing to get a better idea how orderflow is developing.
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Robert Castillo @coldwaterfx FX Trader & Analyst Writer & Editor
Rob is a funded trader from Toronto, Canada, and has been trading currencies, commodities, stocks, and cryptocurrencies for over 7 years. Outside of trading, he enjoys making music, boxing, and riding motorcycles.
