Analyzing The Effectiveness Of Confluence Of Price Action Disciplines .

OPEN Uddin MC. ACCESS Freely available online of GBPUSD looks the same on our chart as it does to every other trader around the world. When a large percentage of traders have the similar levels on their charts, then the price action respects those levels. effort to find so we should not try too hard to find these areas of confluence. Let’s have a look on the intersection of a few price action levels USDCAD 4 hour chart (Figure 1: USDCAD 4-hour confluence chart). Price action trading has various disciplines which can range from Japanese candlestick patterns, support and resistance, trend lines, channels, price bands, break-outs, high and low swings, and chart patterns. We can see how the trend line intersects with a candle resistance level and channel resistance which gives us an area with three intersecting levels as opposed to just one standing on its own. What is confluence of price action disciplines? According to Merriam-Webster, the word confluence means: A coming or flowing together, meeting, or gathering at one point. Confluence signal incorporates several technical analysis methods and thus it becomes a very powerful trading strategy. Confluence of price action trading is simply combining more than one trading technique or analysis to increase the odds of winning on a trade. In the world of Forex trading, the term confluence refers to the intersection of two or more key levels or areas of value. The advantage of confluence comes down to probabilities. Which means the trend lines, horizontal levels, and even channels form in a level or zone and give traders a better entry signal as these intersections provide some of the best zones to watch for buying and selling opportunities. The number of market participants are more likely to gather around in an area where two or more factors signal for a same decision. These intersections are usually formed by the following: The formation of any Pin bar, inside bar or engulfing bar in the chart The crossing of a trend line and a support and resistance level The crossing of a channel, flag pattern or any other chart patter The most common type of confluence occurs when a trend line intersects with a horizontal support and resistance level. These are the most used areas to watch for buying or selling opportunities. Although the best area to watch for entry opportunities are those formed by a trend line, a horizontal support resistance level, and a Fibonacci. When we find such a combination, it will be a wise decision to keep that pair and level on our watch list. We have to keep in mind that some of the best areas of buying or selling opportunities are obvious and therefore require little Of course, there is never any guarantee that the USDCAD will bounce back from that level. Instead it may end up blowing right through this confluence of resistance. But the high number of selling pressure developing in the area ultimately results in favor of the bears. Looking for intersection of key levels is an excellent way to find high probability setups because these areas of confluence tend to attract more buyers or sellers resulting in a reversal or continuation of the current trend. FOREX TRADING STRATEGY SET UP A successful Forex trading strategy is one of the most important aspects of Forex trading. It requires putting together multiple aspects to formulate a trading strategy. It involve sitting in front of a computer screen, analyze the markets, looking for trading signals and taking decisions whether to buy or sell and executes trades. In order to make profit, traders need to identify hidden strength and weakness of the market and should focus on eliminating the number losing trades and achieving more consistent and profitable trades. We would set up a checklist that we follow before we take any trades. The combination of price action levels is not the only criteria for entering a trade. There are several other confluence factors that come into play to achieve the most profits while using the least amount of risk. There are several factors such as trading with the trend, using proper price action signals and always maintaining a proper risk to reward ratio (1:2 or 1:3). So regardless of how good a setup looks, we always have to remain disciplined and use an appropriate stop loss strategy. After all, as Forex traders we only have two optionsbuy or sell. By using a simple checklist, we will be able to quickly and easily identify the best setups. There are eight steps that should be taken into consideration before we place any trade. Figure 1: USDCAD 4-hour confluence chart. J Stock Forex Trad Vol. 9 Iss. 4 No: 270 3

OPEN Uddin MC. Step 1: Moving to the daily time frame As we will follow the price action trading strategy, we would follow a very simple trading strategy which allows us to make profit in both the bull and bear markets and without any indicators. So we will start analyzing the charts with time frame. The daily charts offers a bigger picture of what’s happening with the price action and provides more reliable signals. We can use the 4-hour charts and 1 hour chart for day trading, but the daily charts work best. Price action signals are more reliable once we move from the lower time frames to higher ones. When we use New York close charts, the last hour of each session (4 pm and 5 pm EST) can be extremely helpful in determining a market’s likely path forward because it shows whether buyers or sellers won the battle for that day. We have to keep in mind that the daily time frame will usually give us the best signals as we are trading with price action. The London and New York sessions tend to be more liquid than the Tokyo or Sydney session. But as we are trading at a higher time frame such as the 4-hour or daily time frames, these sessions become less important. Step 2: Drawing key support and resistance levels This is the most important step as it is impossible to identify favorable trades without them. The first thing we should do when opening a new chart is drawing the key levels- horizontal areas, trend lines and chart patterns. It provides us a blueprint of what to do next. It helps brining the market to us. So once we have these levels identified, it’s just a matter of sitting back and watching to see how the market reacts when it gets in the identified levels. We can divide support and resistance levels in three category. Horizontal support and resistance: Whenever we are marking support and resistance levels, we should begin with the higher time frames which allow us to identify the most important areas and disregard the rest. If we use intraday time frame such as the 30 minute or 1 hour then we might get bogged down by insignificant levels. News causes too many price spikes in the market and can distract us from what’s important. Once we have an accurate big picture view from the daily and weekly time frames, we can move down to a 4-hour chart or even 1 hour chart to fine tune as necessary. Trend lines: We have to identify possible support or resistance level within a trending market. We will draw all possible trend lines in the chart to find the best trading opportunity in the break of the swing highs or swing lows. Chart Pattern: Wmost effective chart patterns which include the head and shoulders, channels (bull and bear flags), and we will look for the edges (rising and falling) pattern. We will look for the most precise and easily found level because if we have 30 or 40 viewable levels on a chart, we won’t be able to place a trade. So, by only paying attention to the most obvious levels we get a greater chance of finding quality trade setups. Step 3: Evaluating momentum There is a saying, “the trend is your friend”. Although it is one of the oldest sayings out there, but it’s also one of the most accurate one. The strongest trend momentum or market’s order flow that continue for days, weeks, months are backed by banks and hedge J Stock Forex Trad Vol. 9 Iss. 4 No: 270 ACCESS Freely available online funds. So instead of trading against them we would rather trade with these guys. Step 4: Watching for price action signals In the previous steps we have identified key support and resistance levels and evaluated the market’s momentum using the daily time frame. Now we are sure whether the market is in an uptrend, a downtrend or range-bound. If the market is in an uptrend, we would to begin watching for buy signals from key support and if it is downtrend we would do the reverse. There are three types of candlestick patterns we look for during a trading week namely pin bar, engulfing bar and inside bar. While looking for trade setups, we have to be sure that we have scanned the charts properly and there is a confirmation with the price action signal. Step 5: Watching important news, speeches and events As soon as we have completed all the steps earlier, then we have to check the economic calendar for that day and the following day. Normally forex factory is the best and mostly used economic calendar. We need to check if there is any high impact news of the currency we are planning to place a trade. We need to understand if the US dollar is week or strong. Most of the major currency pairs moves in the same direction most often as the correlation among them is very strong. So, if we see any event is coming then we should wait for it to pass because during this time the market becomes noisy and it can change its direction with the result of the event. So after the noise is over and market is clear from all biasness we will place our trades. Step 6: Identifying entry point We will use price action and confluence before we enter any trade. A favourable risk reward ratio and a confirming price action signal are necessary to make a trading decision. We can make a watch list which means selecting the number of pairs that we understand most. Maintaining a Watch List is one of the best ways to reduce stress levels and find more profitable trades. We will make a list of 9-15 currency pairs which we will look over time to time and find trade set ups. We will create our plan of attack for each week of that selected pairs. Without a watch list, we have no compass to guide our trading. We draw the key levels, check the price action signals prepare our watch list and then when the market opens, we sit and stare at our screens. We find a favourable position and we enter a trade. Step 7: Identifying exit points Before we enter any trade we have to define a profit target and a stop loss level. Many traders only identify a target and forget about their stop loss. In order to calculate the risk we must have a stop loss level defined. So we will use the support and resistance levels in both identifying and existing from a trade. We don’t need to catch the entire move but the majority of the swing to make a profit. Step 8: Calculating and managing risk Once we have identified our exit points for the trade, now it’s time for risk management. For example, a setup with a 50 pip stop loss and a 150 pip target is (1:3 risk reward ratio). Similarly, if we risk 100 and we want to make 300, the risk to reward ratio is 1:3. 4

OPEN Uddin MC. ACCESS Freely available online When calculating the risk of any trade, the first thing we need to do is determine where we should place the stop loss. Once we have the stop loss placement identified, next we have to determine the trade lot size. be evolving as a trader. Now based on the steps mentioned earlier, we will start analysing the market and taking trades. After taking a number of trades we will analyses the result of the trades and will evaluate our strategy. Let’s assume, we have a trading account with 10,000 US Dollar and we want to take 1% risk per trade which is 100 USD per trade. Which means we are ready to lose 100 USD in a trade. METHODOLOGY OF THE STUDY Next we have to check the previously identified stop loss and take profit levels. Let’s assume the stop loss level is 50 pips away from the entry price and the take profit level is 100 pips away from the entry level. So the risk reward ratio is 1:2. Now we have to set at which lot we will make the trade. Here we will use a simple calculation. We will set such a trade lot where 50 pips loss equals to 100 USD loss. As we know, if we trade 1 standard lot then the variation per pip will be 10 USD so if we trade 0.2 volume then the variation per pip will be 2 USD. So, 50 pips loss will be equal to 100 USD loss in monetary value. In this way, we can minimize the risk of trading. If we follow the steps described earlier then trading Forex won’t be complicated. We will no longer feel the need to sit in front of the computer hours after hours searching for setups. Instead, we simply sit back, make a plan of attack and let the trades come to us. If we face any uncertainty then the best thing we would do is nothing. If we find ourselves unable to decide whether a setup is worthy to trade then it’s probably best way to stay on the sideline. The idea that becoming a successful trader is a process and not a project. In other words it has no end date of it as we will constantly There are many characteristics and skills required by traders to be successful in the Forex markets. The ability to determine the various aspects and factors of the market is important for the traders to win this game. If a trader does not know what are the goals and the rules to enter a trade, then greed and emotion will take over and make him lose money. For this reason, the first step of this project was to learn the various disciplines of price action trading and establish a trading plan. With the understanding of price action trading strategy, we mastered different analysis techniques to construct a composite trading system. In this paper, we first described the entry and exit rules for any trades, then we set our money management strategy and finally we have constructed our course of action to enter a trade. Then we have made 267 trades in MT4 platform to evaluate our proposed confluence strategy. ANALYSIS AND FINDINGS Trade journal The trade journal shows all the trades that we executed during the test period from July 01, 2020 to 23rd December 2020 (Table 1). Table 1: Trade Journal. Currency Pair Entry Type Entry Price Stop Loss EURUSD buy 1.1215 1.1172 GBPUSD buy 1.2415 1.2375 Take Profit Trade Taken (GMT 6) Profit or Loss 1.131 2020/07/01 at 7:07 PM 45 1.2565 2020/07/01 at 7:08 PM 45 NZDUSD buy 0.646 0.6412 0.655 2020/07/01 at 7:09 PM 30 AUDUSD buy 0.6902 0.6858 0.701 2020/07/01 at 7:08 PM 35 45 GBPUSD sell 1.2514 1.2566 1.242 2020/07/02 at 6:58 PM EURUSD buy 1.1315 1.1278 1.142 2020/07/06 at 8:09 PM 35 GBPUSD buy 1.2508 1.2462 1.264 2020/07/07 at 5:41 PM 30 EURUSD buy 1.128 1.1222 1.1385 2020/07/07 at 5:41 PM 20 AUDUSD buy 0.6952 0.6912 0.702 2020/07/07 at 7:46 PM 20 NZDUSD buy 0.655 0.6512 0.662 2020/07/07 at 7:46 PM 20 GBPUSD buy 1.2525 1.2485 1.261 2020/07/07 at 7:41 PM 50 -20 NZDUSD buy 0.6595 0.6545 0.669 2020/07/09 at 8:06 PM USDCAD buy 1.3496 1.3442 1.357 2020/07/09 at 6:52 PM 20 USDCHF sell 0.942 0.9464 0.934 2020/07/10 at 6:34 PM 20 GBPUSD buy 1.2595 1.2542 1.27 2020/07/10 at 6:32 PM 50 EURUSD buy 1.1278 1.1236 1.1356 2020/07/10 at 6:32 PM 35 USDCAD buy 1.354 1.349 1.365 2020/07/10 at 12:38 AM 40 GBPUSD buy 1.2528 1.2478 1.263 2020/07/14 at 6:45 PM -18 EURUSD buy 1.1368 1.1322 1.1455 2020/07/14 at 6:45 PM 25 GBPUSD sell 1.1745 1.1792 1.161 2020/07/14 at 8:13 PM -45 USDCHF sell 0.94 0.9445 0.93 2020/07/15 at 12:38 PM 30 USDJPY sell 107.27 107.75 106.2 2020/07/15 at 12:38 PM 35 AUDUSD buy 0.6995 0.695 0.71 2020/07/15 at 12:37 PM 15 EURUSD buy 1.14 1.1348 1.152 2020/07/15 at 12:37 PM 45 USDCHF buy 0.9437 0.9382 0.951 2020/07/15 at 10:12 PM 20 J Stock Forex Trad Vol. 9 Iss. 4 No: 270 5

OPEN Uddin MC. GBPUSD buy USDCAD GBPUSD ACCESS Freely available online 1.2584 1.2516 1.267 2020/07/16 at 8:27 PM 40 buy 1.3521 1.3482 1.362 2020/07/16 at 3:03 PM 22 sell 1.2525 1.2575 1.244 2020/07/17 at 6:06 PM -30 GBPUSD sell 1.2565 1.2632 1.241 2020/07/17 at 2:27 AM 25 GBPUSD buy 1.1785 1.1725 1.189 2020/07/17 at 6:07 PM 50 GBPUSD buy 1.256 1.2508 1.263 2020/07/17 at 6:07 PM 30 GBPUSD buy 1.2572 1.2508 1.273 2020/07/20 at 2:45 PM 50 USDCAD sell 1.3475 1.353 1.335 2020/07/21 at 5:24 PM 35 AUDUSD buy 0.707 0.6925 0.715 2020/07/21 at 5:23 PM 40 NZDUSD buy 0.66 0.6558 0.67 2020/07/21 at 5:23 PM 30 GBPUSD buy 1.269 1.2636 1.285 2020/07/21 at 3:02 PM 60 USDCAD sell 1.3432 1.3492 1.332 2020/07/22 at 6:05 PM 26 GBPUSD buy 1.269 1.2642 1.279 2020/07/22 at 6:03 PM 37 EURUSD buy 1.157 1.1522 1.169 2020/07/22 at 6:02 PM 30 GBPUSD buy 1.27 1.2648 1.285 2020/07/23 at 7:57 PM 40 EURUSD buy 1.1566 1.1528 1.172 2020/07/23 at 7:52 PM 30 USDCAD sell 1.3418 1.3474 1.3325 2020/07/23 at 7:52 PM 30 GBPUSD buy 1.2875 1.2822 1.299 2020/07/27 at 8:39 PM 25 EURUSD buy 1.1751 1.17 1.185 2020/07/27 at 8:14 PM 30 EURUSD buy 1.1742 1.1696 1.184 2020/07/29 at 3:41 PM 20 GBPUSD buy 1.2956 1.2905 1.308 2020/07/29 at 1:55 PM 40 GBPUSD buy 1.303 1.2978 1.321 2020/07/30 at 9:59 PM 50 NZDUSD buy 0.6644 0.66 0.675 2020/07/30 at 10:36 PM 20 AUDUSD buy 0.7142 0.71 0.721 2020/07/30 at 10:36 PM 20 USDCHF sell 0.9118 0.9168 0.9 2020/07/30 at 10:36 PM 20 EURUSD buy 1.1795 1.1735 1.19 2020/07/30 at 10:35 PM 30 GBPUSD sell 1.3035 1.29 1.3088 2020/08/04 at 8:16 PM 20 GBPUSD sell 1.2998 1.287 1.3052 2020/08/04 at 6:52 PM 30 GBPUSD buy 1.308 1.32 1.3025 2020/08/04 at 1:04 PM 55 EURUSD sell 1.1772 1.169 1.1818 2020/08/04 at 4:32 PM 20 EURUSD buy 1.1775 1.19 1.1718 2020/08/04 at 1:04 PM -30 EURUSD buy 1.182 1.195 1.1774 2020/08/05 at 7:55 PM 40 USDCHF buy 0.9202 0.93 0.916 2020/08/03 at 6:49 PM 20 USDCAD buy 1.341 1.359 1.3365 2020/08/04 at 6:53 PM -35 USDCHF sell 0.9115 0.901 0.9167 2020/08/05 at 7:50 PM 30 EURUSD buy 1.177 1.185 1.1725 2020/08/10 at 7:34 PM -45 USDCAD sell 1.3365 1.325 1.3418 2020/08/10 at 7:34 PM 40 USDCHF sell 0.9158 0.903 0.92 2020/08/10 at 7:38 PM 20 GBPUSD buy 1.3095 1.319 1.3045 2020/08/10 at 7:55 PM 40 USDCHF sell 0.916 0.903 0.9205 2020/08/11 at 10:18 PM -20 USDCAD sell 1.329 1.318 1.3336 2020/08/11 at 10:19 PM -20 GBPUSD buy 1.3086 1.32 1.3032 2020/08/11 at 10:31 PM -35 EURUSD buy 1.183 1.192 1.1778 2020/08/13 at 6:16 PM 30 GBPUSD buy 1.3075 1.318 1.3022 2020/08/13 at 6:16 PM 40 USDCAD sell 1.3225 1.311 1.328 2020/08/13 at 6:16 PM 30 XAUUSD buy 2009 2019 1999 2020/08/18 at 2:30 PM 50 EURUSD buy 1.1925 1.208 1.1878 2020/08/18 at 6:31 PM 35 EURUSD buy 125.8 126.9 125.18 2020/08/18 at 6:31 PM 30 USDCHF sell 0.9035 0.895 0.9078 2020/08/18 at 6:31 PM 20 XAUUSD buy 1940 1947 1934 2020/08/20 at 2:23 PM 70 XAUUSD buy 1946 1356 1939 2020/08/20 at 9:23 PM 50 XAUUSD buy 1940 1947 1934 2020/08/20 at 9:23 PM 70 XAUUSD buy 1931 1940 1924 2020/08/21 at 2:23 PM 40 XAUUSD sell 1924 1909 1932 2020/08/21 at 2:23 PM 100 J Stock Forex Trad Vol. 9 Iss. 4

What is price action? Price action is the study of price movements in a market, with no indicators required. It is a trading technique that allows a trader to read the market to identify any clues on where the market could move next. With price action, traders ignore the fundamental analysis factors and focuses more on recent and past price .