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Subject: TRADING WITH CONFLUENCEChapter 10 – Trading with ConfluenceconfluenceIf you look up the word ‘confluence’ in the dictionary, you’ll find that it means:“A coming or flowing together, meeting, or gathering at one point”.This definition also fits how we use confluence in trading. We want to see multiple factors coming together or meeting / gathering at one point on the chart, support the trade idea / entry signal.The more confluence a particular trade setup has, the higher-probability it becomes. Waiting patiently for a confluent price action setup is how you Trade like a Sniper, and how you increase your chances of success in the market.You can make a living just by trading one or two very obvious / confluent trade setups a month, once your account gets big enough. But, don’t worry about that for now, just worry about learning to trade well, and trading well means you wait, and wait some more, then when a confluent price action setup comes along, you pull the trigger with confidence.Ready to checkout some examples? Let’s go…How to Trade With ConfluenceIt’s time to bring together everything you’ve learned to this point. Trading with confluence is when you put all the pieces of the ‘puzzle’ together.I have a very simple formula to help you remember how to trade with confluence, I call it ‘TLS’ or Trend, Level, Signal…1.Identify the market’s trend or bias. If there is no clear bullish or bearish trend, then you might have a sideways bias on the market. If it’s a nice well-defined trading range, then we can look to trade the range as we discussed back in Chapter 3 of this course.2.Identify the key chart levels of support and resistance and mark them on your charts. You may also include the daily chart 8 / 21 EMA’s as levels, as well as 50% retraces and event areas as well. All of these count as ‘levels’.3.Look for obvious price action entry signals in-line with your market bias / trend from levels in the market. The market levels you have aligning with one another, the better and more ‘confluent’ the trade setup is.Thus, when in doubt, remember ‘TLS’ and ask yourself if the setup you’re thinking about trading makes sense in the context of the daily chart Trend, Levels and Signal (is it a well-defined /obvious signal)Here’s a quick list of some of the main factors of confluence you should look for: An uptrend or a downtrend; a strong trend is one factor of confluence in and of itself. Static (horizontal) support and resistance levels. These are the “classic” horizontal support and resistance levels that typically connect highs to highs or lows to lows. ‘Key’ support / resistance levels on the daily chart are best. Exponential moving averages. I use the 8 and 21 day EMAs on the daily charts to help with trend identification and dynamic support and resistance identification. Both the 8 and 21 EMAs are factors or levels that can add confluence to a price action setup. Event areas. Event areas are levels in the market where a significant price action event occurred. This can be a strong directional movement after a price action signal forms, or it can simply be a rejection of a level followed by a strong directional movement…some significant “event” needs to have occurred at a certain point in the market, we can then consider this an event area or level. You can learn more about event areas in Chapter 8 of this course. 50% retrace levels. I personally watch for about 45% to 60% retraces for another factor of confluence. I don’t get into all the other Fibonacci extension levels as I think they are too discretionary and haphazard to be of any use. It’s common knowledge that most major moves in the markets tend to retrace approximately 50% at some point after they form. But all the other Fibonacci levels are simply a case of “if you put enough levels on your charts, some of them are bound to get hit…”, in other words they are more messy and confusing than relevant or practical.An important note on the ‘quality’ of a price action signal…The definition and form of a trade setup can also contribute to its confluence. Meaning, the better formed and more ‘perfect’ a setup looks, the more confluence the setup has. What we are looking for is an obvious / well-formed price action signal. There will be many signals you see that look they ‘could’ be potential trades, but far fewer fall into the category of ‘painfully obvious’ trade setups that if you don’t take you will literally be angry and feel stupid that you didn’t…THESE are the best signals to trade.
What you want to see is a well-defined price action signal. I’ve given you many examples of these in previous chapters, so have a look back if you need to refresh your memory. Basically, I am talking about a pin bar with an obvious tail on it and a very small real body on it that just ‘looks perfect’ , a ‘perfect’ looking fakey with a nice long pin bar as the false-break bar or a nice looking two-bar false-bre
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