A Cure for Over Trading
02/14/2013 6:00 am EST
In trading, when two or more variables are present, a confluence exists and these areas are ripe for the picking, writes CoachShane of NetPicks.com.
When two or more things collide, a disaster can result. It doesn’t matter if it is two storm fronts like we recently saw or a vehicle collision. When things collide, many times good things do not result.
In trading, the collision of two or more things can be a blessing! Many times it can spell the difference between success or failure of a trade. 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? A bigger reaction? Perhaps, but at least a greater chance of something happening.
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.
In this chart below, it is a recent EUR/USD chart. Let’s walk through a few things:
a. is the top of the move
b. is the bottom of the move
A simple Fibonacci retracement is drawn from point A to point B and several levels are drawn on the chart.
- Is where price shot higher from and that price level is obviously supporting price at that time. Price does eventually tumble through that level albeit a little hesitation just below it. The red line represents a price area that once supported that price.
- 2 Is the 50% retracement level, which happens to coincide exactly at that former support area.
You can clearly see that price rallied from b right to that area. The moving average is pointing down giving you an objective direction to take a trade. How you enter, is up to you. It could be a range breakout or a trendline break. Perhaps you dialed down to a smaller timeframe and saw a candlestick pattern. The point is that a confluence of a former support level and a Fibonacci retracement area gave you an objective area in advance to look for a trade if price returned.
Let’s look at chart 2.
Line 1 is the bottom of the range of price at a. A Fibonacci retracement is drawn from a-b giving you areas to look for price to return to. Price rallies to the 78.6% level (yes, this level is a great level due to the way order blocks are formed) and notice the huge drop after price hits the 78.6% level. (as an exercise, go through charts and see how price reacts on that level!).
The first chart gives you about 80 pips and the second one is over 200 pips! The risk, is minimal so think of the position sizing.
A confluence is a great thing to look for when going over your charts. It is a proactive exercise to pinpoint zones where if price returns that you can look to take some action.
Even better, it can force you to be more selective in your trade selection, which can alleviate the disease of over trading.
By CoachShane, Contributor, NetPicks.com