Trading Education

The Confluence Trap

Every single trader starts with the same desire: to find the perfect trading strategy. You learn and study support and resistance. Then you add moving averages. You add RSI, MACD, Fibonacci retracements, and Bollinger bands. Soon after you apply these confluences to your charts, it looks like a spider's web. You can not even see anything properly, as everything is messed up. Instead of finding an answer, you have made yourself a highway to confusion, analysis paralysis, and lost equity. This is how too many confluences are destroying your trades, and what you need to do to clean up your charts and make them profitable again.

By RelicusRoad Team 3 min read

The Paradox of Choice, where too many confluences equal too much confusion.

Confluence refers to using many technical analysis factors to have a higher probability of a profitable trade. Yet, using all this helpful data will lead to destructive noise.

When you put 5 or 6 different indicators onto your chart, they are inevitably going to disagree:

 Your Moving Average says the trend is bullish. (Buy)

 Your RSI says the market is overbought. (Sell)

 Your Fibonacci level says to wait for a deeper retracement. (Hold)

Using these contradictory confluences will cause major mental fatigue. Instead of confidently taking your trade, you will sit on your hands wondering what to do; trying to resolve a puzzle that cannot be solved.

Late Entry Nightmares and chasing the market.

If you’re waiting for many confluences to agree, you are going to pay the ultimate price for waiting.

The Missed Move: By the time indicators A, B, C, and D all agree with each other and give you the green light, the market will have already had its entire major move.

Chasing the Trade: If indicators are contradicting themselves, or you have an idea and the candles go ahead without you, you’llchase the market. This means entering a trade extremely late, at the very top/bottom of the entire market move, hitting your stop loss and draining equity.

The Vicious Cycle of bleeding equity

The psychological drain that these confluences cause will form a very nasty cycle.

  1. Clutter your charts with indicators.
  2. Wait too long to enter a profitable trade, therefore missing it.
  3. Get annoyed and force entry on a new trade that is going against you, and blow up some capital.
  4. Try to prevent further losses in the future, add another indicator, making the problem worse.

This cycle continues until your trading account is completely blown. You are losing not because your strategy is flawed, but because your execution is paralyzed by confusion and noise.

Keep it simple.

No institution is ever trading with messy, cluttered charts. They know how to be simple and read what the market is actually saying, and not what mathematical formulas tell them.

In order to avoid the confluence trap, make sure you always follow these few simple rules today:

 Three rule. The maximum amount of confluences you should ever use in any given setup is between two and three indicators. If more than that, just forget the setup, walk away.For example (Market Structure + Support/Resistance Level + Candlestick Rejection)

Accept losses are not your fault. There is no strategy with a 100% winning percentage. Be content with a simple trade where your indicators confirm. Better to lose on a simple, clean trade than chase a noisy, lagging one.

Simpler is better in forex

Your chart should be your eyes to the market and not an abstract art form. Remove unnecessary indicators. Stop looking for a magical setup to guess the future. Make your strategy simple and allow for a clean chart to look at and analyze the charts and candle patterns easily.

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