Confluences For Higher Probability Trading

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Transcript of Confluences For Higher Probability Trading

  • Trading Confluences For High Probability Trading http://www.netpicks.com/my-kingdom-for-a-confluence/

  • If we agree that traders use different but often common methods of looking

    at a chart, then is it possible to use that information for a higher

    probability trade? The answer is a resounding YES!

  • Think of this..if many people are looking at "X" and then something happens at "X", expect a reaction. If many people are looking at "Y",

    expect a reaction.

  • What if "X" and "Y" meet and you get twice as many people looking at the

    same thing In trading, we call it a confluence. When two or more variables are

    present, a confluence exists and these areas are ripe for the picking.

  • Think of traders who trade moving averages such as the 20 SMA. The

    general trade plan is to look for pullbacks or rally to the moving

    average and then take a trade in the direction of the trend.

  • Support and resistance traders look for price to move to their zone, hold, and

    then trigger them into a trade. Fibonacci remains a popular method

    as well and is generally used for clustering of levels or other

    confluences

  • Let's plot a few things on the chart and see if anything lines up.

    I wanted to keep things very rigid and unless price pulled right into the

    confluence, I placed an X to indicate that close is not close enough.

  • While price may have hit one of the variables, to keep a strict trading plan

    we would require price to be in the entire zone.

  • Pointing out the blue box which coincides with the biggest drop makes things interesting. Not shown on the

    chart but price is hitting the 100 period SMA, pulling into a Fibonacci area, and an area that was former

    support.

  • Do you get in on every trade? No and that is one of the good things about

    looking for a few variables to come in line and that is..less trading.

  • There are many ways and tools you can use to find a confluence of factors

    to influence your trading decisions. From simple price structure to

    indicator usages, the list of combinations is virtually endless.

  • This chart shows a keltner channel, trend line, 50 SMA, and 100% projections of prior swings. To make our plays rigid, we require

    price to show us strength by breaking above the channel before we'd be

    interested in a pullback trade. You could also use smaller trend line channel to

    indicate strength.

  • 1. We need price to almost touch our 100% projection and only after price

    moves outside the top of the channel.

  • 2. The top of the channel must be penetrated.

  • 3. These lines are for a visual clue for this article as to which corrective

    swing we are using for our projections.

  • 4. Our 50 SMA must come in to close proximity of the pullback.

  • 5. Price need not touch the trend line but again, must come within a

    reasonable distance.

  • To keep things fair, I've discounted areas that didn't have a line up of all our variables. In real trading, you'd

    attempt to stay in the trend until you determine the current up move has

    potential for a deep correction or even a total trend change.

  • This would limit your need for trade entries as you ride the move from your

    initial trigger.

  • CONFLUENCE OF STOPS One group of people who use

    confluence very well are those with the big money. What they like is a confluence of obvious swing levels,

    range levels, and the group of traders who like tight stops for bigger position

    sizing.

  • They like to use a confluence of traders decisions and tendencies.

  • We've all been in a trade where price starts in our direction, changes

    direction taking out a low, our stop, and then continuing in our direction.

    Even better, price exhibits a sharp move and pulls in counter-trend

    traders who quickly see their position underwater and are forced to exit.

  • Understand that the larger players can't simply accumulate or close their positions any time they choose. Well,

    they obviously can but at slippage amounts they'd prefer not to have.

  • The best place to do business for them is at areas where liquidity is added to

    the market. One good place is where a cluster of stops will likely be.

    Trigger stops

    Accumulate/liquidate Prevent excessive slippage

  • Another area is at levels where counter-trend traders enter the market.

    Push price counter to the overall bias.

    Bring in those looking to pick tops and bottoms. Reverse the direction and stop them out.

  • This weekly charts overall bias is to the upside I used a daily chart to draw the

    trend lines.

  • The daily price ranged near the top of the trend line, formed a smaller range

    inside the range, and then price slammed hard. There is a strong break

    of the trend line which is a sign for counter-trend traders to pile on the

    down move.

  • Price drops lower and the bigger players begin to accumulate at lower

    prices. Their buying forces the market higher causing the counter-trends to hit the panic button and exit and in doing so, add liquidity to the market which the bigger players scoop up.

  • If you require a few factors to line up to interest you in a trade, you will

    probably be safe from the pitfalls of over trading. I don't think having

    redundancy as part of your confluence system is a good thing though.

  • Having several trend indicators, momentum indicators, channels, trend

    lines, and structure is overkill.

  • For pullback traders, having a structure point or some other tool to measure a pullback keeps you from taking those that are shallow and weak. Using a momentum indicator can show you when the rate of change in price is

    turning in your favor.

  • Using a handful of tools is enough to pinpoint an area of confluence that has the potential for you to enter a

    trade.

  • Break out traders, may look for a range and need to see a range form inside the range. Perhaps they will need to see failure tests of lows or highs to

    validate the range and flushes in the opposing direction.

  • Looking for a confluence will keep you out of the "fear of missing out" and ensure you only take planned out trading opportunities and not be

    seduced by the price moves alone.

  • As with all trading plans, the key is testing and consistency before you

    decide to put the money on the line.