Smart Risk: Identifying High-Quality Change of Characters in Trading

Introduction

• Importance of identifying high-quality and valid change of characters (CoC) in the market.
• Mastering this skill is crucial to avoid market traps and become a profitable trader.
• Topics covered in the episode:
  • Types of CoC trading strategies.
  • Associated price actions.
  • Key criteria and rules for high-probability trades.

Definition of Change of Character (CoC)

• Occurs when the dominant market momentum subsides, signaling a trend shift.
• Indication of a potential shift in control from buyers to sellers or vice versa.

Identifying a Valid Change of Character

• Bearish Scenario:
  • Price breaks and closes below the most recent major low and demand zone.
  • Example: Price in uptrend, breaks recent major low and demand zone → Downward momentum → Second CoC → Anticipate bearish order flow.
• Bullish Scenario:
  • Price breaks and closes above a major high and supply zone.
  • Example: Price breaks through supply zone → New demand zone created → Anticipate bullish trend.

Essential Criteria and Rules

1. Higher Time Frame Mitigation

• CoC valid only if price reverses from a higher time frame supply/demand zone.
• Invalid if CoC occurs without interaction with a supply/demand zone.
• Example: Bearish structure → Price moves upwards, breaks structure but doesn't touch demand zone → Not a valid CoC.

2. Liquidity Sweep

• Confirmation of High-Quality CoC:
  • Price establishes static liquidity zones near higher time frame areas of interest.
  • Types of static liquidity: Equal lows, equal highs, dynamic trend lines.
  • Example: Price in downtrend → Forms equal highs near supply zone → Sweeps liquidity → CoC confirmed.

3. Double Zone Breakout

• Enhanced CoC Effectiveness:
  • Price should break and close below/above two successive supply/demand zones.
  • Example: Price breaks through two demand zones, leaves inefficiency → Strong confirmation for trade entry.
  • Additional Scenario:
    • Price breaks first demand zone, pullback, creates second supply zone (decisional zone) beneath extreme supply zone.
    • Wait for price to sweep liquidity before entering market.

Recommendations

• Backtesting:
  • Essential to backtest strategies at least 100 times before applying to real account.
  • Tools: Trader Edge platform for backtesting.

Conclusion

• CoC is critical in identifying market structure shifts.
• Follow the criteria to increase the probability of success.
• Call to Action: Subscribe, comments, feedback, and suggestions for future topics.

References

• Fastb (recommended trading website for economic news and tools).
• Trader Edge platform for backtesting strategies.