You Can't Trap Forex Prices With Confluence No Matter How Hard You Try

Most traders new to Forex have never heard of the word confluence

. Traders who use it most, call themselves price action traders. These traders make bold statements about the superiority of trading naked. Trading naked means that you don't use indicators on your charts. Indicators are bad because they lag the price according to price action traders. You are bad it you don't trade using price action.

(Let me reveal a little secret here - anyone who places a trade is a price action trader regardless of how you decide to place your trade.)

For confluence to occur something important on the chart happens, like price action. Actually no one really can define price action other than to say it is a "pattern" that occurs and when it does "this" usually happens; "this" meaning the result of the pattern.

The problem with that statement is the word "usually". "Usually" can't be measured unless perhaps it is your Aunt Ninny who comes to your house and "usually" brings a plate of chocolate chip cookies. After years of bringing them "usually", really means "always".

So the first problem in the area of confluence is that it is used primarily with a system of trading that is subjective in most cases. In other words when a price pattern appears, you can "usually" count on such and such to happen, but not always. It is interpretative and 10 traders looking at the same pattern could make 10 different decisions, sort of like Congress trying to divide up tax payer money.

To strengthen the "usually" traders use confluence. Confluence means that if our pattern appears and we can also find a Fibonacci level that exists at the same level, and there is support or resistance, and a 100 moving average crosses at the same place, and the Elliott Wave confirms the trade than we have confluence. It means that several trading techniques all agree therefore the trade is "usually" more correct. The idea inferred here is that because of all these additional "signs" and "wonders" the trade has a better than "usual" chance of succeeding.

I'm having fun here but the weakness of technical analysis is that for the most part as David Aronson, Evidenced-Based Technical Analysis, points out is story telling. Any trading system that cannot be programmed (put in algorithmic format) and therefore quantified is just a story about what happens when we get this "fork in the road." Confluence would just be a fork-in-the-road where there are more signs pointing in one direction, than the other. But the signs could be wrong. Have you ever watched a movie with three endings?

The take away here is that you can't trap or corner price on your charts with lines and candlesticks and Elliott Wave Theory and semi-Elliott Wave Theory, or by using Gann or Fibonacci. Unless you can produce true statistical results that tell you when you get to the fork-in-the-road, that 53%, or 61%, or 73%, or some other percentage of the time going this way produces "X" results, you are just telling a story that has a variety of endings.

Learn to trade in an objective manner with statistical data that supports your decisions. Statistical data can be such things as knowing the average draw down of a signal in a particular market condition.

That information could be gained by pulling data off your chart and then running tests to see what results you could expect. A similar thing could be done with average retracement, or the ratio of the trends initial move in on direction and the retracement. All of this information can be used to make better decisions and identify risk thus making profits understandable and not fictional.

by: Paul Dean

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