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.
Your Turn
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.
Sure to try out this technique. Thanks for sharing.
Thanks for stopping by, Michael. Be sure to keep us updated on your progress.
Hi. Can you please define “no immediate resistance”. Thank you.
It means that there’s no resistance that should prevent at least a 1:2 risk to reward ratio. In other words the setup has room to run.
There was an inside bar prior to the pin bar (2 bars prior). Wouldn’t that constitute a possible entry signal above the mother bar? What was the reason for not taking that? Thanks!
Hi Remmiguel,
No reason not to take it, this chart was just just illustrating the pin bar. You could have just as effectively traded the inside bar you’re referring to.
Thanks for your comment.
Justin
Thanks for the reply, Justin. But the pin bar would have taken you out if you had placed your SL below the inside bar for better RR, right? I guess what I was asking is how you could have filtered that trade out to prevent the loss.
Sure, but that’s the risk you take with a stop loss below the inside bar and not the mother bar. If the stop loss had been below the mother bar you would have been okay.
It isn’t about preventing the loss as much as it is about always using a favorable risk to reward ratio. Let’s just assume you lost on the inside bar setup and had a winner with the pin bar setup. Using a favorable risk to reward ratio you would still be up 2% if risking 2% on each trade. You would have lost 2% on the inside bar and gained 4% on the pin bar. And that’s assuming that you were only able to get 2R out of the pin bar setup…
Hopefully that makes sense.
Justin
Makes perfect sense. Hope to see you on the inside. Just need to talk to the wife… 😉
Sounds good my friend. Hope to see you there.
What is the effect of round nomber in price
Like all technical analysis, they can be psychologically important. I don’t personally rely on them unless justified by the surrounding price action.
Thats sound quite interesting im gona use it.also want to know more about false breakout.
Philasande, it just so happens that I wrote about false breakouts last week. 🙂 Here you go… https://dailypriceaction.com/free-forex-trading-lessons/false-breakout-strategy
Dear Justin, I was confused about confluence, but now confluence factor cleared. thanks
You’re welcome, Mirza.
i had been applying this strategy. but what is getting me confused is when and how to enter a position
That will depend on the strategy you’re using.
Hi justin…is it still be tradeable setup if we use 50 % strategy because the open buy position at below key level?thanks
Sure, just know that if your order is beyond the key level, it’s less likely to get triggered.
Hi Justin , Nice explanation about confluence factors, the most I like was the listing it down as CF1,2….its a more systematic way to trade. thanks for this new Idea.
Hi Justin , Nice explanation about confluence factors, the most I like was the listing it down as CF1,2….its a more systematic way to trade. thanks for this new Idea.
Ciao Justin oggi non lavoro (io lavoro 7 giorni su 7 perchè sono sugli impianti di sci) quindi sto studiando le tue lezioni, CHE BELLE!!!!! Da quando sto usando alcuni tuoi dati sento di avere piu controllo sul forex,prima c’era tanta confusione presa un po di qua un po di la…….Le sto leggendo piu volte perchè la traduzione non è perfetta, ma cosi facendo le sto duplicando meglio.Sapere dove entrare e mettere gli stop loss e i TP fa molta differenza!!!!
Sapere che il Pin Bar, Inside Bar, e Engulfing sono i 3 indicatori che usi rende tutto piu facile e semplice, uniti al fatto che usi tempi giornalieri diventano molto affidabili. Lo stress sta sparendo ora perchè sento che il mio controllo è aumentato, grazie alla conoscenza che mi hai regalato,di conseguenza la mia responsabilità è piu alta.Queste 3 cose: controllo-responsabilità-conoscenza,vanno assieme,quindi basta aumentarne una che aumentano anche le altre due.
GRAZIE TANTE JUSTIN!!!!!!!
Hi justin, how about fakey set-up? I dont usually trade an inside bar because of possible false break above the mother bar. What’s your say about it?
Hi justin, how about fakey set-up? I dont usually trade an inside bar because of possible false break above the mother bar. What’s your say about it?
Hi Justin
Great technique. Thank you
Thank you for this lesson which is clear and useful like all your lessons and analysis. Can you suggest a strategy for trailing the stop loss in order to protect profits without closing the trade premature?