The Risk of Trading: Mastering the Most Important Element in Financial Speculation

LEVERAGING EDGE USING CONFLUENCE

The short list of edge components discussed each has its own unique contribution to the concept of discovering trade advantage. One of the most powerful concepts that provides this essential edge is an overlapping leveraged portfolio of all of the above components and others in use. Simultaneous usage of these components and conditions exponentially provide some of the greatest opportunities to succeed in trading any market.

Confluence is the leveraged support of multiple and various edge-based components that support your decision to enter a trade. Confluence theory states that the greater the number of components to support your trade, the greater the edge. Stated differently, the greater the confluence of support, the greater the probability that the trade will be successful. Let's show an example using a few of the edge components just discussed.

Figure 4.13 shows a trade setup in our plan that calls for a long entry when price pulls back between the .50 and .618 Fibonacci retracement area. Again we are using the S&P500 futures contract in this example. This is a historically powerful reversal area and works well as a stand-alone setup or with an added layer of edge using confluence of support. Notice how price retraces not only to the desired Fibonacci area but also lands right on both the 50-period and 100-period simple moving average support lines. All three setup indicators are lined up in the same entry area. You have this trade in your ...