Confluence
Tue, Apr 15Confluence occurs when multiple technical analysis methods provide the same trade signal. Typically, these methods involve technical indicators, but they can also include chart patterns, price action, and chart overlay tools.
The term "confluence" originally describes a geographical point where two or more rivers merge to create a single body of water. In trading, it refers to the convergence of various trading signals.
What does “confluence” mean in trading? In the chart below, you can see a confluence of indicators forming a strong resistance area, which includes:
- A descending trendline
- 200 SMA acting as a dynamic resistance level
- 61.8% Fibonacci retracement level
- RSI indicating an “oversold” condition
Other examples of confluence might include:
- RSI indicating oversold conditions while the price is near a support level.
- A trendline aligning at the bottom of the Bollinger Band.
- Price approaching its 200 SMA, coinciding with the 50% Fibonacci retracement level and a significant support level.
In summary, the concept of confluence can be defined as: “An area in the market where two or more structures converge to create a high-probability buy/sell zone.” The confluence of trade signals can enhance accuracy and profitability.
What is “confluence trading”? “Confluence trading” involves combining multiple trading techniques or analyses to improve the chances of a successful trade. You utilize several trading indicators that all provide the same “reading” to confirm the validity of a potential buy or sell signal.
Confluence refers to any situation where multiple trade signals align on your charts, indicating a trading opportunity. For instance, if you rely on a single technical analysis tool with a 40% accuracy rate for predicting price movements, and then apply a second, non-correlated technical analysis tool to refine your decision, you enhance your chances of success.
In essence, you leverage the concept of “confluence” to identify a trade setup using various technical analysis methods, all of which independently signal a similar price direction. This can occur when support and resistance levels align closely with Fibonacci retracement and extension levels.
Psychological levels, previous highs and lows, and dynamic support and resistance levels (such as moving averages or Bollinger Bands) can also serve as significant areas of interest. When these levels coincide, they create stronger support or resistance zones, which can be utilized as entry points or take profit levels.
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