It is possible to profit in financial markets by understanding how they function and what the trends are, as well as by following the movements of major players. SmartMoney Concepts (SMC) is a trading strategy that helps retail traders gain an edge by analyzing the actions of institutional investors, such as banks and hedge funds. One of the most critical components of this strategy is the "Change of Character" (CHOCH), which refers to a profound shift in market behavior. CHOCH is a strong signal that indicates a shift in the market's trend structure, and when used correctly, it can open the door to profitable opportunities for traders. The concept of Change of Character (CHOCH) represents a critical structural break that marks the end of one trend and the beginning of a new one.
What is Change of Character (CHOCH)?
CHOCH is a
technical analysis term used within the frameworks of Smart Money Concepts(SMC) and Inner Circle Trading (ICT). It signals a shift in the structure of a
trend and is considered an indication that "smart
money" may be changing direction in the
market. CHOCH occurs when there is a break in the current market trend
structure—that is, when the direction of the trend changes. This shift signals
a transition of control between buyers (bullish) and sellers (bearish). Within
the Smart Money Concepts (SMC) framework, Change of Character is a powerful
tool for identifying trend reversals. By recognizing structural changes in the
market, traders can follow the movements of institutional players and turn this
insight into profitable trading opportunities. CHOCH refers to a break in price
action that disrupts the existing trend structure and signals the beginning of
a possible move in the opposite direction. Change of Character (CHOCH)
identifies a noticeable shift in price structure. This usually presents itself
in the following way:
During a
downtrend, the price forms a bearish structure by creating lower highs (LH) and
lower lows (LL). However, at some point, if the price breaks above the previous
lower high, this structure becomes invalid. Such a break signals the end of the
bearish character and indicates that the market is beginning to form a bullish
structure. In a downtrend, when the price moves above the last lower high and
forms a new higher high, this is identified as a bullish CHOCH.
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| Bullish CHOCH in SMC |
Similarly,
during an uptrend, the price forms a bullish structure by creating higher highs
(HH) and higher lows (HL). However, if the price breaks below the previous
higher low, this signals the end of the bullish character and the beginning of
an impending shift to a bearish structure. In an uptrend, when the price moves
below the last higher low and forms a new lower low, this is identified as a
bearish CHOCH.
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| Bearish CHOCH Market Structure |
Thus, CHOCH is identified by observing structural changes and price behavior. These structural breaks provide strong clues that the character of a trend is shifting, especially when they occur after liquidity grabs, making them highly pivotal. Unlike traditional trend reversal patterns in classical technical analysis, CHOCH tends to offer earlier signals.
Trading Strategy with CHOCH
In the
Smart Money Concepts (SMC) approach, the CHOCH (Change of Character) structure
not only indicates a trend reversal but also offers strategic trading
opportunities. Many traders interpret and utilize the CHOCH formation in the
following way:
First, the
price usually moves toward a liquidity zone and accumulates liquidity there. It
then reaches a crucial Order Block (OB) level. When the price breaks the
previous market structure and forms a CHOCH at this point, it serves as a
strong signal that the trend is reversing. After CHOCH forms, the price often
retests the broken area. Opening trades during this retest—especially around OB
or Fair Value Gap (FVG) zones—is an effective strategy. Stop-loss orders are
placed just below or above the structure where CHOCH occurred, while profit
targets are set according to the newly established market structure. Strategies
that can be applied with the CHOCH formation can be grouped under three main
categories:
1. Trend Reversal Strategy
This
strategy is suitable for traders who want to identify a market direction change
early and take a position accordingly. If the CHOCH signal is supported by a
break of an Order Block (OB) along with increased volume, it confirms the trend
reversal. This structural change indicates that a different market character
now dominates. Risk management is maintained by placing the stop loss on the
opposite side of the CHOCH level.
2. Pullback Strategy
After a
CHOCH forms, the price typically pulls back toward the broken area. During this
retest, Order Block (OB) or Fair Value Gap (FVG) levels act as strong support or resistance zones. Entering trades at these levels allows for lower-risk
entries and enables clearer profit targets.
3. False CHOCH Filtering Strategy
In some
cases, formations that appear to be CHOCH may actually be false signals.
Especially after a liquidity grab, the price might temporarily break the
structure and seem to change direction. In such scenarios, Order Block (OB)
analysis and volume monitoring become critically important. To determine
whether a genuine change of character is occurring or if it's merely liquidity
accumulation, these factors must be evaluated together. CHOCH signals can be
misleading, particularly on lower timeframes, so confirmation on higher
timeframes is recommended.
CHOCH
signals should not be used in isolation but evaluated together with the
following factors:
- Order Block (OB) zones: CHOCH is more meaningful when it follows a strong OB.
- Liquidity levels: CHOCH signals occurring after crucial liquidity zones tend to be stronger.
- Timeframe alignment: CHOCH formations on higher timeframes are more reliable.
Combinations
to watch for:
- CHOCH signal + OB break + volume increase → Confirmation of trend reversal
- CHOCH + retest + reaction within OB → Entry timing
- CHOCH + filling imbalance within OB + volume spike → Strong position entry point
When analyzed correctly, CHOCH not only identifies trend reversals but also offers high-probability trading opportunities. Effective use of CHOCH requires solid market analysis, proper timeframe selection, and risk management. When combined with other Smart Money Concepts (SMC) tools, CHOCH becomes an indispensable strategic element for traders seeking to gain an edge in the market.