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.