The most powerful combination a Forex trader can use is price action and confluence. That might sound bold, and it is, but for good reason.
You may be thinking I’m a little biased because I’m a price action trader. But I’m here to tell you that confluence is the most powerful tool a trader can use, regardless of how he/she trades.
It’s also one of the more overlooked methods of trading which is why, in my opinion, so many retail Forex traders struggle. In order to appreciate the power of this combination, we need to first define each term.
Price Action: the study of what past price has done in the market, and more importantly, how current price is reacting to it
Confluence: the coming together of two of more “things”. In our case as Forex traders, these things are factors which can influence future price action.
See how that works? We’re studying how current price reacts to past price action, and simultaneously looking for factors which can influence future price action. I’m not going to focus on price action too much in this lesson because I’ve written separate lessons on it and I really want the focus to be on confluence this time around.
Before going any further, I want to be very clear that there’s no such thing as a sure thing in Forex. However when used correctly, the combination of price action and confluence can help put the odds in your favor.
Stacking the Odds in Your Favor
The best thing we can do as Forex traders is to stack the odds in our favor. This is exactly what the casinos do. They know they have the upper hand because they stack the odds in their favor. Sure, they lose on some customers, but they know that over the course of a year those odds will play out in the form of profits. So start treating your trading account the way casino owners treat their business, by stacking the odds in your favor.
To illustrate how we can do this, let’s study an example of price action and confluence working together. To keep things simple, I’m going to name each piece of confluence a Confluence Factor (CF).
Let’s break down what’s happening in the GBPCAD daily chart as if we were analyzing the price action for a potential trade. Here’s what we’d look for:
- We would already have our key level of support and resistance drawn based on the resistance noted as CF #1
- When the trading day closed, we would notice the well-formed pin bar above a key level
- The trend is clearly up as marked by CF #2
- Price seems to have room to run as there’s no immediate resistance, giving us at least a 2R trade, possibly more as noted by CF #3
- Lastly, our moving averages are providing dynamic support in confluence with our key level
So would this pin bar be a valid trade setup to go long? Absolutely! We have all of our CF boxes checked. In other words we’ve put the odds in our favor. Think of each CF as another 15 or 20 percent added to the odds of price moving in the desired direction. The more CFs a price action setup has, the better. But please be careful with this! As I mentioned above, there’s no such thing as a sure thing in Forex, so always remain diligent no matter how great a price action setup looks.
That about wraps up this lesson on price action and confluence. I hope you’ll walk away from this with a better understanding of the power of this combination when used correctly. The best way to build confidence with any trading strategy is to immerse yourself in it, so start observing and tracking price action setups that have confluence and see for yourself. Just be sure to return to this lesson and let me know how it’s going using the comments section below.
I’d love to hear about your experience using similar price action techniques. If you’re not using them, do you see yourself implementing the techniques discussed here or something similar? Use the comments section below to ask your questions or just leave a comment. I’ll be sure to respond.