By Rob Colville on October 22, 2016 in
Trade confirmation, also known as validation or even confluence, can be a divisive topic among traders. Some prefer or even require confirmation signals in order to execute set-ups with added confidence, while others believe that the time spent waiting on additional trade confirmation can cause unnecessary delays and even missed trading opportunities. In which camp do you rightfully belong, or are you currently undecided?
As it happens, I like having multiple factors lining up and working together in favor of a particular trade idea, although The Lazy Trader methodology doesn’t require trade confirmation beyond the baseline requirements for taking a set-up in the first place. What we want to do today, however, is examine the trade confirmation debate from all sides in order to allow traders to be objective in determining whether confirmation could help their trading process and bottom-line performance.
It’s important first to note that trade confirmation has a couple distinct meanings within the industry and trading community. For our purposes today, we’re dealing only with the first of the two definitions shown below:
Trade Confirmation – 1) The systematic use of additional technical and/or fundamental indicators to further validate the merits behind a particular trade set-up.
2) A written or electronic statement furnished by brokers acknowledging that a trade has been completed and stating terms like the day and time of execution, price, settlement terms, etc..
Searching for viable trade confirmation calls for more than simply slapping arbitrary technical indicators on the same chart once a viable signal is generated by price. Because technical indicators typically fall into one of the four broad categories below, it tends to be advisable to know in which category different indicators fall, and to then search for trade confirmation in one (or more) of the others.
Trend – Includes factors like moving average crosses and the popular moving average convergence/divergence (MACD) indicator, among others
Momentum – The relative strength index (RSI), stochastics, and the commodity channel index (CCI) are all popular momentum indicators
Volatility – Bollinger bands, standard deviations, and average true range (ATR) are all well-known and commonly used measures of volatility
Volume – Popular volume indicators may include on-balance volume (OBV), which is well-liked by market technicians, and volume rate of change. There are also more complex oscillators that measure volume as well
Also worth mentioning is that viable and often quicker trade confirmation can be generated through fundamental and intermarket analysis as well. For example, oil prices tend to move in lockstep with commodity currencies like the Canadian dollar (CAD) and others. And, perhaps needless to say in this day and age, the trajectory of central bank monetary policies is a consistent factor that makes for powerful head or tailwinds for world currencies. All this might make fundamental and intermarket analysis worthwhile additions to, or replacements for, multiple and often complex technical indicators.
To make a definitive decision on whether trade confirmation is right for you, first consider the multitude of factors mentioned above. Also consider your own technical analysis prowess and whether you have the knowledge and experience to validate signals using trend, momentum, volume, and/or volatility indicators? And lastly, consider whether the steps required to get valid trade confirmation fit your trading strategy and time frame. Short-term traders, especially, may decide the extra time and resources just aren’t feasible. And for Lazy Traders, the inherent strength built right into our go-to chart pattern, the pin bar reversal, is all the trade confirmation we feel is needed.
Now, this is not to talk anyone out of looking for additional (valid) trade confirmation, but also consider the following: History and wide-ranging market statistics say specifically that additional confirmation does not increase the likelihood of a winning outcome. Plus, when you throw in confirmation bias—when traders tend to overvalue factors working in favour of the trade and downplay those working against it—and it appears to me that trade confirmation is better served as a nice complement to a qualifying set-up, but not a requirement for trading.
Why not test it and decide for yourself, though? Do some demo trading at your leisure and conduct some fair testing to see if additional trade confirmation positively impacts your confidence and bottom line.
And, if you’d like some assistance and any number of opportunities to learn more about confirmation and achieving your maximum potential as a trader, consider joining The Lazy Trader community for education, trade ideas, and personalized mentoring. Your no-risk trial membership is ready and waiting, so please just click the below banner to get started today!