Successful trading essentially involves two factors: the state of your mindset and the situation reflected on your trading charts. The crucial point is to harmonize these two factors, rather than allowing them to clash and lead to failure.
This post provides a quick checklist of tips that you can implement to enhance the probability of successful trading.
The checklist is divided into two major sections: Chart Confluence and Mental Confluence. Confluence implies the convergence of different factors to a common point, and in trading; it indicates an increase in the likelihood of success. The more confluence there is in a trade, the more supporting factors are in place to boost the chances of success.
Factors Supporting Trading Decisions on Charts
In trading, “confluence” refers to the presence of factors that support a particular trade setup. The more supporting factors, or confluence, a price action pattern has, the greater the likelihood of success in entering the market.
Here is a checklist of chart confluence factors to look for to improve the chances of a trading signal leading to a profitable trade:
1. Is the trade setup clear?
Learn to recognize good price action signals and develop an instinct for identifying them. The best price action signals are usually unambiguous and well-defined, making it easy to determine if a signal, such as a pin bar, is worthwhile.
2. Did the trade setup occur in a trending market?
A price action trade signal that aligns with a strong trend has added significance, with the trend itself considered a major factor of confluence supporting the trade signal. If a signal forms after a retrace to a support or resistance level within a trend, it is at a high-probability point within that trend and has strong confluence.
3. Is the setup at a key level of support/resistance if there is no trend?
If the price action setup did not occur in a trending market, check if it formed at a key level of support or resistance. In most cases, a signal should align with a trend or come from a key level of support or resistance, even if it is against the trend or range-bound.
4. Is there an “event area” nearby?
An “event area” is a level of support or resistance that previously saw a significant price movement. When price approaches these levels, it can provide a highly-confluent area to look for entry signals or even consider a blind entry.
5. Is there a major 50% retrace level?
A price action signal at a major 50% retrace level can also be a highly confluent setup. If a well-defined price action trade signal forms at a level where a key chart level of support or resistance intersects with a 50% retrace level of a significant move, it can be a “no-brainer” trade.
6. Are there Exponential Moving Averages (EMAs)?
EMAs can provide another factor of chart confluence. In a trending market, a pullback to an EMA can offer a good entry point. If a support or resistance level intersects with an EMA and a price action signal forms, it can be a highly-confluent trade setup to consider.
Achieving Mental Confluence
In addition to the technical aspect of trading discussed above, the other significant aspect you need to consider is your mental state. Even if you are a top-notch market analyst, you cannot consistently profit from the market if you lack the proper “mental confluence”.
To succeed in the market, you need to have both chart confluence and mental confluence. In other words, just as a price action signal requires the right chart conditions, your mental state must be in the right condition before you can trade profitably.
Here are some things you can do to foster the proper trading mindset and further increase your chances of success in trading:
1. Develop a Trading Plan
Having a trading plan is crucial to keep your mental state intact and ensure consistency in your trading performance.
2. Embrace Reality and Don’t Rush
It’s important to remember that the market will always be there, and you should not feel pressured to enter trades. Being relaxed and patient will lead to better trading results over time. If there are no trading opportunities with chart confluence today, there will be more signals in the future.
3. Trade Higher Time Frames
Focusing on higher time frames can help you maintain a relaxed and focused mindset while trading. Lower time frames can cause unnecessary stress and result in losing trades.
4. Listen to Relaxing Music while Analyzing the Markets
It’s recommended to listen to calming music while analyzing the markets or doing any online work.
5. Maintain a Job
Trading should not be your sole source of income until you have become consistently profitable. You should continue with your current employment and have a steady income stream to reduce financial stress and maintain the right mental state for successful trading.
6. Let Go of Expectations
Trying to win every trade can lead to losses. Accept that every trading strategy will have losing trades and manage your risk properly. Avoid getting too emotional over any one trade as the distribution of winners and losers is random.
7. Be Minimalistic
A minimalist approach to trading can lead to a more relaxed and disciplined trading mindset. You do not need multiple indicators, to analyze numerous markets, or use expensive equipment. Instead, focus on simplicity and set and forget your trades.
Conclusion…
In conclusion, trading success is not a matter of luck but rather the outcome of proper training, education, and experience in utilizing effective trading techniques such as price action. It is a culmination of consistently doing small things correctly over time. A single misstep in discipline can trigger a chain reaction of emotional trading mistakes. Therefore, utilizing checklists like the one outlined in this lesson can help establish good trading habits, which is the key to preventing future lapses in mental discipline and trading judgment.