By the end of this tutorial you will know what is confluence , why is important and how to use it in the financial market. Without wasting anytime Let’s get straight to it!
What is confluence?
confluence means a coming together of things
In the financial market, Confluent occurs when 2 or more technical strategies or indicators are combined together and intersect each other, thus forming a confluent point in the market.
So, basically, when we look for confluent areas in the market we are looking for areas where two or more levels are intersecting. I’ll show you what I mean by that. Keep reading!
Over the past few weeks, i took a long trade on GBP/USD that made me to write this article.
This one buy position on GBP/USD reveals what it means to trade with confluence. Here, you will get to see how I mixed 3 of my favourite price action strategies to give me one higher probability trade.
Below is a buy position on GBP/USD I am talking about.
Looking at the chart carefully can you really tell why I took a long position?
Here is why…
I first drew a rising trendline then waited to see if the price would retrace back to touch the rising trendline for the 3rd time. See the picture below.
If you have been following my free Forex trading signals you will know how powerful trendlines are. To learn more about trendline strategy click here.
2. Support and resistance levels
As i was waiting to see if price will retrace and touch my rising trendline, I also noticed that the same level acted as a support level, that’s when I introduced my second trading strategy: a support and resistance level. See the picture below.
Notice price has tested this level more than 5 times in the past?
After drawing my trendline and support and resistance level, Indeed the price retrace to the level where both strategies “meet”.
At this level, I had two different trading strategies, both showing a buy signal.
To learn how to trade support and resistance levels/zones click here.
3. candlestick confirmation
At the same level ( confluence point) where these two trading strategies met, a doji candlestick signal was formed.see the picure below
In my personal experience, there is no better indicator than candlesticks.
They are the best and most reliable signals When you combine them with some other Trading strategies like I did here.
Here I used a doji as my confirmation to enter this trade
If candlesticks are new to you or you don’t know the most important candlesticks, this post here will help you understand the most important and reliable candlesticks.
4. Mt4 indicators
I am not a fan of indicators but for some traders who prefer to use a combination of price action and indicators, one could have simply added the RSI or stoch on the chart as the 4th additional confirmation, which happened to show oversold at that time I took this trade. See the chart below
You can also use other trading strategies/indicators like moving averages or bollinger bands but you really don’t have to combine lot of trading strategies, 3 strategies are more than enough.
Now, the point or level where i entered this buy position was where all these strategies met. That level is called “confluence level”
How this position worked out?
After a doji was formed that was my confirmation to execute a buy trade.
I risked 30 pips for this position and my profit target was 640 pips as you can see on the charts. Fortunately the trade went as I anticipated and I managed to make 640 pips profit few weeks later
Of course, trading with confluence doesn’t guarantee you a 100% win rate, that’s a fact. There are no guarantees that confluence will result in profitable trades but confluence can give you higher probability trades.
When you combine trading strategies, and if they come together in the same direction then there is a very good chance that the market will move your way.
You will most likely get less trading opportunities, but you also end up with a higher probability trades.
should have this gbpusd position went against me, I would have only lost 30 pips.
This is one of the best things i like about confluence-when confluence emerges, a rather tight stop can be placed with a favorable risk: reward ratio.
I hope that this article has shown how simple it is to combine your trading strategies to give you high probability trades.
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