I’ve been in several trading groups that all teach market structure in slightly different ways. While I can’t say one way is better than the other, I’m certainly grateful to have learned a few different methods so that I could figure out what works best for me — especially when it comes to identifying a proper change of character.
Full disclosure: the change of character is at the basis of all my trading strategies but it hasn’t always been sunshine and rainbows. For one, it took me a while to get the hang of spotting a proper change of character, probably because I’ve learned a few different methods. But also, I was struggling to figure out exactly which change of character to trade from on the chart.
Since then, I’ve come up with a slightly modified approach that I think will make it easier to identify a proper change of character. Hopefully you’ll agree!
What is a Change of Character (CHoCH)?
A change of character refers to a shift in market structure.
For example, a change of character can occur when a market that was previously trending in one direction suddenly changes course and starts trending in the opposite direction. In most cases, you will see this happen at significant levels of support and resistance.
Here’s a visual:
Pros & Cons
A change of character is a great way to catch large moves in the market, however as mentioned above, not all CHoCHs are created equal.
Pros:
Early signal that price action is shifting
High R:R trade set-ups
Cons:
Can give false signals
Identifying CHoCHs In Price Action
A change of character can be identified using fractal structure. Unlike swing structure, fractal structure is the movement in price between individual candlesticks, where as swing structure is made up of a series of impulses and corrections, consisting of many candlesticks, as seen below.
Swing structure can be used to identify the overall larger trend where as fractal structure is the smaller swings in price action that make up swing structure.
Fractal Highs & Fractal Lows
Fractals were made famous by the legendary trader, Larry Willams. You may have seen a few of his indicators on TradingView, including his Williams Fractal indicator.
The fractal indicator is used to identify potential trend reversal points in the market.
When using the fractal indicator you’ll notice that certain highs and lows are highlighted, while others are not:
In the image above, each of the green arrows indicate a fractal high, while each of the red arrows indicate a fractal low.
How are these highs/ lows determined?
If you notice, each fractal high contains two consecutive lower highs to its left and two consecutive lower highs to its right. Therefore, each fractal high is a 5-bar candlestick pattern where the highest high has two consecutive lower highs on either side of it. The opposite would be true for the fractal lows.
Here’s another visual:
Since then, Williams’ fractals have been modified to include more bars, or less bars depending on your strategy. The most popular version of Williams Fractals are the 3 or 5 bar fractals.
For my strategy, I’ve been using the 3-bar fractal:
To make this easier for yourself, you can use the Fractals indicator by Nephew_Sam_ on TradingView, which allows you to toggle between the 3 or 5 bar method.
Let’s look at some examples using the 3-bar fractal method:
Now that you know how to find fractal highs and fractal lows, let’s identify a bullish and bearish change of character on the chart.
Bearish Change of Character:
Bullish Change of Character:
One of my favorite ways to use a change of character in trading is to look for these price action signals in areas of support and resistance.
If price is coming into an area of support or resistance, I look for a change of character to tell me that price action may be starting to shift.
For more details and tips on how I identify and use CHoCHs, check out the video above.
In my next post I will be diving into how to I trade using CHoCHs, including entries, and how I filter out potential false signals. Stay tuned!
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Thanks for reading,
Mr. E
