One price action concept a lot of traders use in their trading is the idea of confluence in the market. Confluence is when there is more than one technical analysis level coming together at the same point in the market. Price action traders say finding a setup which has confluence with other technical levels means you have found a high probability trading opportunity and there is a high chance of the trade working out successfully.
What I’m going to show in today’s article is why confluence is actually a myth and holds no truth because of the assumptions it makes about how retail traders can affect the market price.
What Is Confluence ?
First off lets take a little look at what confluence is just in case there are traders reading this who have no knowledge on the concept.
Confluence is a term used to describe a situation where there are multiple technical analysis levels all coming together at the same point. For example if we saw a bearish pin bar appear at a resistance level which was also happened to be at the 50% retracement level then we would have a point of confluence because two technical levels are meeting at the same location in the market.
The image above shows a bullish pin bar which had confluence with a daily support level and the 50% Fibonacci retracement.
Confluence can be found with any technical analysis level in the market, it’s not just support and resistance or Fibonacci retracements which cause confluence, trendlines – supply and demand – indicators when any of these tools meet together at the same location it’s considered a point of confluence.
The books and websites which teach traders about confluence say the more technical levels/tools which are coming together at the same point the better chance the price has of reversing in the opposite direction.
To a new trader this sounds like something which makes sense, but when you think about how the forex market works in terms of how money is made in the market then you realize this whole idea of confluence doesn’t actually make sense at all.
Why Confluence Doesn’t Make Sense ?
The reason why confluence doesn’t make sense is because of the assumptions it makes about how the forex market works.
People state the reason why having multiple technical levels coming together at the same point is significant is because lots of traders will all be placing trades in the same direction. So when you have a pin bar at a support level and a Fibonacci level the people using the support level will be placing buy trades because the market is at support and the traders using Fibonacci will be placing buy trades due to the Fibonacci level.
Therefore because there are so many traders placing buy trades the price must have a high chance of moving up due to all the buy orders being put in the market. The problem is it doesn’t matter how many traders are placing buy trades, what matters is which type of trader is placing these trades.
If the traders placing these buy trades are retail traders, then the price does not have a higher chance of moving higher because we know the only way for the banks to make money is to make retail traders lose, if a high percentage of retail traders are all doing the same thing then its unprofitable for the banks to also begin doing the same thing as their not going to be able to make any money because no retail traders will be in losing trades.
Gurus will try to prove to you confluence works by showing you examples of candlestick patterns or other entry methods which have two or more technical levels going through them working out successfully and then showing you candlestick patterns which didn’t have any levels going through them resulting in losing trades. Then they’ll say the reason why the candlestick pattern was unsuccessful was because it didn’t have confluence with any other technical levels.
These gurus are telling you lies, if confluence really worked then it would mean if we did a study of pin bars we would find the ones which had confluence with other levels will result in more winning trades than ones which didn’t, even carrying out a small study proves that this isn’t the case.
Another problem is if the technical level itself actually has any validity in the market. Fibonacci levels as explained in my Fibonacci article, do not have an effect on the market price, traders think they do which is why they place them on their charts, now if the Fibonacci levels don’t mean anything then how can they be used to increase the likelihood of a pin bar working out successfully ?
The defining factor in whether a trade will work out profitably or not is the reason you have for taking the trade.
For people using confluence their reason for taking a trade is because everybody else is also taking the same trade, we know this is the wrong thing to do because of how the market works, I’ve spoken before about how important it is to be a contrarian when trading the forex market, you can’t make money by doing what everyone else is doing because 90% of traders are consistently losing, if you take trades based on what the majority are doing then you will become part of the 90% that don’t make money from trading forex.
What Confluence Really Does
Now we’ve looked at why confluence doesn’t work and isn’t a valid concept in the market, I want to show you the effect it has on retail traders who implement it in their trading.
Really the word confluence should be changed to confidence as this is what it actually gives retail traders.
What better way to have more conviction in a trade you plan on placing then to see many different levels line up at the same spot, people don’t want to have losing trades, they want certainty their trade is going to be a winner. Confluence gives them this certainty by making them feel as though lots of other traders are taking the same positions as them.
Since the whole concept of confluence is based on the idea that “if enough traders are do the same thing the market will move” it has the effect of making retail traders believe its safe to do what everyone else is doing, they think “if all of these traders are placing sell trades then if I also place a sell trade we can all win together” this is the mindset the traders using confluence have, they think it’s better to join in and do what other people are doing than it is to come up with their own opinion.
The trader using confluence assumes the more levels he sees at the point where he wants to take his trade the better the chance his trade has of working out successfully. If he see’s a pin bar has form which has no technical levels going through it its likely he’ll pass on the trade as he’s not confident of it turning out to be a winner.
Now if he see’s a pin bar which has a support level and the 50% retracement level going through it he’ll have the conviction to take the trade because he thinks the technical levels increase the probability of the trade working out successfully, really they don’t and in fact they probably decrease the chance of the trade working out because of the way the bank traders will always take the market in the direction which causes the highest number of traders to lose money.
What I Consider Confluence
My definition of confluence is similar to the standard definition only instead of me looking for lots of different technical levels lining up at the same point I look for things which tell me a large number of traders are all trading in the same direction.
For example one point of confluence I’ll look at is the length of the current trending movement. If I see the market has been moving in the same direction for a long time then I know a large number of traders will be placing trades in the direction of the movement. If the most recent swing in the movement is made up of large range candles then I know even more traders will have entered trades because they associate big candlesticks with trend strength essentially giving them more conviction of the price continuing to move in the direction of the trend.
So really what I consider confluence and what the books and websites consider confluence are the same thing, we’re both looking for lots of traders taking the same action in the market only I’m doing this in order to place a trade in the opposite direction and the retail traders are doing this to take a trade in the same direction as everyone else.
The points explained in this article are the real understanding of confluence you need to have, not the definition gave to it by most website/books which state lots of technical levels meeting up at the same point gives the market a higher chance of moving in the opposite direction, if you trade with this understanding then you’ll join the 90% who consistently lose money trading forex, and its likely you’ll never be able to achieve your true potential trading the markets.