Confluence happens when many technical analysis approaches produce the same trading signal. These are often technical indicators, but they can also be used in conjunction with chart patterns, price movement, and chart overlay tools. Originally, the term confluence refers to a geographic location where two or more rivers join to form a single body of water. However, using the same reasoning, it is currently employed in trading to describe the convergence of many trading signals.
What is a Confluence Zone?
A confluence zone is a point at which two or more trading signals cross, resulting in a strong buy/sell signal. When trading, it is advisable to look for a trade that has a high probability yet a low risk. “How will we locate high-probability trade with little risk?” is the query. This strategy is suitable for both intraday and swing traders. You may want to look for at least three indications/signals to come together at or near a major price level when trading with the confluence zone. These signals include trend lines, support/resistance levels, supply/demand zones, Fibonacci levels, and so forth. The Confluence zone is split into two sections: the Confluence Buying Zone and the Confluence Selling Zone.
Confluence Zone Strategy
When you “confluence trade,” you mix more than one trading approach or research to possibly boost your chances of winning a deal. You employ a combination of trading indicators that all offer the same “reading” to confirm the legitimacy of a possible buy or sell signal. Confluence refers to any situation in which many trade signals line up on your charts, indicating that you could enter a trade. You employ the notion of “confluence” to locate a trade setting by combining various technical analysis approaches, and all of these different types of analysis indicate a similar directional price movement. This occurs, for example, when support and resistance levels coincide with Fibonacci retracement and extension levels. Areas of interest can also include psychological levels, previous highs and lows, and dynamic support and resistance levels (such as moving averages or Bollinger Bands). When these levels coincide, they generate stronger support or resistance levels that can be used as entry or exit points.
Confluence Buying Zone
By inspecting the asset’s price chart and identifying two or more BUY signals at the price level, we can identify a confluence zone. Asset price above or near Trend line support, horizontal support, demand zone, Fibonacci level (50%, 61.8%), moving average line, bullish candles formation near support line/zone, price rejection at a critical support level, and so on are all potential BUY signals.
Confluence Selling Zone
Similarly, we can locate a confluence zone that delivers a SELL signal or prohibits us from buying an asset in a selling zone. Stock prices that are below or near the Trend line resistance, horizontal resistance, supply zone, Fibonacci level (50%, 61.8%), moving average line, bearish candles forming near resistance line/zone, price rejection at major resistance level, and so on are all possible SELL signals.
Confluence Zone Pros & Cons
- Confluence Zone is a great technique for both novice and advanced traders for getting multiple confirmations before picking trades.
- This technique can boost a trader’s confidence and emotional stability when trading.
- Knowing how to use confluence zones to trade effectively may require a level of experience in order to avoid confusion.
- Certain situations could occur sometimes whereby the indicators involved in the confluence give conflicting signals.
Confluence is beneficial. Experiment to your heart’s content. With a handful of price action patterns, you may even incorporate fundamental analysis. However, don’t clog up your decision-making process. When you start to lose sight of what each pattern or tool is teaching you, it’s time to simplify. Finally, you may believe that because of a combination of factors, you are invincible; you cannot lose. That is not the case. Confluence trading is not the Holy Grail of trading and you should always practice trading on a demo account to begin with.
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