Trading really boils down to two things; what’s going on inside your head and what’s happening on your charts. The key is to get the two in-sync with one another, rather than on the collision course to disaster you may have them on right now.
Today’s lesson is going to be a ‘quick checklist’ of tips that you can begin using immediately to help tilt the odds of trading success in your favor.
No fluff. No ‘filler’. Just honest, effective and easy-to-understand tips to give you a better chance at making money in the markets.
Before we get started, I just want to inform you that this checklist is broken down into two main categories: Chart confluence and mental confluence. Confluence basically means ‘things coming together to a point’, in trading, this basically means stacking the odds in your favor. The more confluence a trade has, the more things there are that have come together to support that trade.
As a price action trader, my main concern is finding price action signals with confluence. When I say ‘confluence’, I am basically saying I want to see supporting factors or reasons why I should take a particular price action setup. The more supporting factors of confluence a price action pattern has, the more likely I am to enter the market from it.
Here’s a quick checklist of some factors of chart confluence you can look for to increase the chances of a price action signal turning into a profitable trade for you…
1. Is the trade setup obvious?
Learn what good price action signals look like and develop a gut feel for identifying them. For example, a pin bar signal with a nice long tail and small real body is usually a ‘safer’ pin bar to consider than one that’s ‘on the fence’ between being a pin bar and not being a pin bar. The best price action signals are usually very obvious and well-defined, and as a result, it shouldn’t take a lot of thought to determine something like “is this a good pin bar or not?”
2. Did the trade setup form in a trending market?
A price action trade signal that’s in-line with a strong trend has extra weight behind it and we can even consider the trend itself as a major factor of confluence supporting a particular trade signal. If you get a signal that forms after a retrace to a support or resistance level within a trend, that signal has formed at a high-probability point within that trend, and at that point it definitely has confluence.
3. If no trend, did it form at Key levels of support / resistance?
If you’re considering a price action setup that didn’t form in a trending market, did it form at a key level of support or resistance? In most cases, you want to see a signal form either in-line with a trend or from a key level of support or resistance if it’s against the trend or range-bound.
4. Is there an ‘event area’ nearby?
A chart event area is a highly confluent level of support or resistance that previously / recently saw a large directional movement of price originate from it. When you see price approaching one of these event area / levels, you need to take notice because they can be highly-confluent areas to watch for price action entry signals or even to consider a blind entry.
5. 50% retrace levels
A price action trade signal at a major 50% retrace level can also be a highly confluent setup. Often, you will see a key chart level of support or resistance lining up with a 50% retrace level of a major move, this is a very confluent level when this happens and if you get a well-defined price action trade signal there it’s almost a ‘no-brainer’ trade, meaning you should probably take it and not think too hard.
EMAs or Exponential Moving Averages can provide us with another factor of chart confluence. A pullback to an EMA in a trending market can often yield a good entry point into a trending market. If you get a support or resistance level intersecting with an EMA and a price action signal forms there, that’s a highly-confluent trade setup that you may want to consider taking.
Besides the chart / technical aspect we discussed above, the other major aspect of trading you need to stack in your favor is the mental aspect. You can be the best market analyst in the world, but if you don’t have the proper ‘mental confluence’, you will never make consistent money in the market.
You need to have both price action confluence and mental confluence if you want to make money over the long-run in the market. By that I mean, just as a price action signal needs to form in the proper chart condition, i.e., with confluence, your mental state needs to be in the proper condition before you can trade profitably.
These are some things you can do to try and cultivate the proper trading mindset, so that you can further stack the trading odds in your favor…
1. Trading plan
A trading plan will glue together everything and help hold your mental state together. You can learn more on how to make your own trading plan in my trading course.
2. Accept reality, don’t fight it.
One huge thing many traders forget, is that the market will be there tomorrow. You should not feel any pressure to enter a trade or any ‘need’ to be in a trade. The more relaxed and patient you are about trading, the better you will do over the long-run. Don’t be in a rush, there are more trade signals just around the corner, tomorrow or the next day or next week. If there’s no obvious trade with chart confluence today, then check back again tomorrow.
3. Focus on higher time frames
Focusing on higher time frames is perhaps the easiest way to stay relaxed and ‘in the zone’ as you trade. When traders start focusing on 5 minute and 15 minute charts / other low time frames, they start getting over-involved, stressed out and ultimately it causes them to lose money. Trading higher time frames will help you develop and maintain mental confluence as you trade.
4. Listen to relaxing music as you analyze the markets
Recently, I came across this cool site called focusatwill.com that lets you pick from an array of relaxing music that is especially designed to help you focus and tune out distractions. I highly recommend it for analyzing the markets and staying calm / relaxed while doing so, or really for any type of online work.
5. Have a job
I know many of you are interested in trading because you want to quit your job and be financially ‘free’. But, you need to understand that if you put yourself in a position of ‘needing’ to make money trading too soon, you will end up losing money. Trading cannot be your ‘Plan A’ right out of the gate. It may take years before you can start paying your bills from your trading. You need to maintain your current employment so that you have income coming in. If you eventually get good enough at trading to quit your job then that’s awesome for you, but I can promise you it will never happen if you quit your job and make trading your ‘only option’ before you’re actually successful at it. To maintain the proper mental confluence to make money in the market, you need to be as stress-free as possible, and if you feel like you have ‘no other option’ but to make money trading, you’re going to become emotional and over-trade / over-leverage and ultimately lose.
6. Remove expectations
Many traders try to win every trade, and this ultimately causes them to lose money in the end. You need to accept that every trading strategy is going to have losing trades sometimes. Furthermore, the distribution of winners and losers is random. This means, even if you win 60% of your trades, you never know if any particular trade will be a winner or loser, since they are distributed randomly. Think of a jar full of 60% green marbles and 40% red, you shake the jar up so they are all randomly distributed. If you stick your hand in blind folded and pull out a marble, you have a random chance at a green or red marble, even though once you pull all the marbles out, 60% would be green. Thus, you have to give your trading edge a large series of trades to play out in your favor, and you can’t get too down over any one losing trade, because if you’re sticking to your trading plan, it’s just part of the game.
Don’t try to make every trade a winner. Instead, manage risk properly and just accept losing trades as a cost of being a trader / doing business in the market.
7. Be a minimalist
Creating ‘mental confluence’ to be a successful trader is all about taking a minimalistic approach to trading. Being relaxed about your trading, being patient and disciplined are all things that are much easier to achieve if you take a minimalistic approach to trading. This means, you don’t need indicators, you don’t need to analyze 40 different markets, you don’t need to look at lower time frames, you don’t need to stay up all night watching your trades, and you don’t need expensive data feeds or 10 computer monitors.
Set and forget your trades and become a trading minimalist and you will create the proper mental trading state simply as a ‘side effect’ of your minimalist approach to trading.
Although to those on the outside, it may seem like it, trading success is not the result of getting lucky. Rather, it’s the end result of training and education on proper trading techniques like my price action trading techniques, experience / screen time and putting everything together. Essentially, trading success, like most things in life, is the end result of doing a lot of little things right, consistently.
It only takes one slip-up of your discipline to start an emotional snowball of trading mistakes. Using checklists like the one discussed in this lesson will help you develop proper trading habits, and developing these proper trading habits is really the only way to safe-guard yourself from continuing to have these slip-ups in your mental discipline or trading judgment.