Confluence is one ‘buzz word’ used so often in trading that it’s almost lost meaning. Using confluence properly can improve your bottom line and boost your expectancy.
First step: keep a journal.
This is a basic requirement for trading. Even a screenshot journal can be enough. You need to see what you’re doing well and what is holding you back.
Once you have a journal, add a column for any confluence that you use. If you use fibonacci in your trading, write it down. If you take a trade with fibonacci influencing your decision, journal it.
(Confluence being any factors which converge with your trade idea and improve the odds – more on that later)
After a while you will find out what confluence is good and what is bad. You may find something which is super effective at boosting your expectancy.
Conversely, you may uncover an element which has a negative effect on winrate.
Here is an example of a trade with confluence.
How do we analyse confluence?
If you track two different confluences, filter the results of your trades, both winners and losers.
A basic (made up) example of different winrates:
No confluence – 50% – profitable
Fibonacci – 55% – profitable
RSI – 45% – break even
Fib + RSI – 40% – not profitable
It’s clear what to do here.
Evidently, RSI is holding you back. While you believe it adds to your trading, it’s hindering your progress.
RSI in this example stops trades from being profitable. Remove it.
If you are journalling these statistics as you go along, this is an incredibly simple way to boost your results.
Going through winners and losers individually might reveal some more information.
It could be the case that your confluence, which improves winrate, also has lower average winners. This makes sense since we discussed it here, higher winrate strategies usually have lower average payoff.
Not necessarily a bad thing. You could then reveal your confluence also gives you smaller losers overall.
We now know:
- You have a higher winrate
- Smaller winners
- Smaller losers
- Higher average payoff
From here you may want to increase your position size, if comfortable doing so.
You’ve cut the size of your losers, so you can afford to increase the size on the trade.
Winrate increasing can decrease the size and length of your drawdowns too, more reason to adapt sizing.
If you are using confluence or have a feeling but no proof, go back through your journal to find out what’s going on. Just one step among many which can boost your bottom line.