Today we’re going to talk about something called confluence . I’m absolutely positive that some of you have come across the term multiple confluence of factors and wondered “What on earth is this multiple factors confluence term that this guy keeps blabbing about?”Not to worry it’s not a virus. Multiple factors of confluence is a coincidence of scenarios of occurring at the same time on the forex charts. These trade signals usually lead to great opportunities for profits.They’re like several alarm bells going off at the same time. Hope I’ve calmed some nerves.
So here is what we’re going to do. We’re going to define what multiple confluence and then we are going to learn how to trade confluence with price action analysis. Of course, backing all this are charts showing you how it’s really done. So onward we go.
What on Earth is Multiple Factors of Confluence?
A lot of you have probably been wondering”What On Earth is Multiple Factors of Confluence?” Well, multiple factors of confluence is a situation in the forex market where two or more points intersect to form a hot point-another name for multiple factors of confluence. It’s like two rivers coming together to form a super river. So what you’re looking for on the charts is several trade signals along either support or resistance levels given off the same trade signals. And when that happens, this creates great trade opportunities. Let’s see what multiple factors of confluence looks like on the chart below.
This graphic nicely the illustrates the confluence scenario.The three labelled areas all represent trading signals all happening at the same time both the support and resistance levels. No 1 can be seen with the bullish pin bar at the support level.Signal number 2 is just around resistance and number 3 is a the breakaway points. Such signals represent great opportunities to cash in.
I guess the next point will be:
Which Multiple of Confluence Factors Should I Look Out For?
There are certain multiple confluence factors you should look out for when trading confluence. The first one will be
This is pretty obvious isn’t it? Both upward and downward trends are fairly straightforward in that the price signals are right along both trends. It shouldn’t be too difficult to spot them. Let’s take a look at confluence in action in a downtrend.
This is a sweet example of confluence in action in a downtrend. The four red crosses on top of the pin bars all represent trading signals . You’d do well to take advantage of these trading opportunities. The same principle applies to an uptrend. By the way if you want to catch up on how to trade trends, read my post Trade Trends With Price Action Analysis .
Next up is:
Exponential Moving Averages
Exponential moving averages(or EMA’S)are average price calculations with more emphasis on most recent price data. This makes them react quickly to price change. So in relation to price action analysis, you use the 8 and 21 day EMA’S to identify trends abdout dynamic support/ resistance zones. . EMA’S also help add confluence to price action.Please dont get dynamic support/resistance zones confused with static support/resistance levels. The latter stays the same,while the former changes shape. This makes for great trading opportunities.If you want to read on static support/resistance levels, check out my post Identify Support and Resistance Levels with Price Action Analysis . Now let’s see EMA’S in action.
Here we have three factors at work here including the EMA’S. The 8/21 EMA’s helps identify the support level. through the red arrow. And as you can see, the other red arrows point to the trading opportunities along the dynamic support zones Unlike their static brethren, these support zones change shape-which creates significant trading opportunites. Also at play here is a well defined price action setup- ably helped by a price rejection, which triggers a strong upward surge.
Which brings us to:
Static Support and Resistance Levels
Static support and resistance levels are the traditional support and resistance levels that connect highs to highs and lows to lows
In case you’ve forgotten what static support and resistance levels look like, this is. On the uptrend, you see the higher highs and higher lows shaping up. And as we descend, lowerhighs and lower lows take shape. And just like any other confluence setup, you see price signals along the support level as indicated by the blue squares.
Now event areas are levels in the market that have been hit by a price action event. The event could be a strong trend movement as a result of a price signal, or it could be a rejection at the support/resistance levels followed by a strong trend movement. The moral of the story is some game-changing event needs to occur for the area to be considered an event area. Let’s take a look at what an event area looks like.
As you can see, a significant price has triggered a huge directional push through the resistance level.For such an uptrend to take shape, a price increase has to take place. The same goes for a downward trend.Price has to drop for the sellers to break through the support barrier.
How Do I Trade Multiple Points of Confluence With Price Action?
Just look for a price action set up at a point of confluence. Look for the factors of confluence that we’ve discussed above. And if at least two of these factors align with the pride signal, then that will be the perfect time to enter a trade. Just keep three things in mind as you trade:
- There must be a dominant trend- whether up or down
- There must be a well-defined dynamic support and resistance
- There must be an indication of static resistance.
That’s a wrap for “Something Called Confluence.” Hopefully , you now understand that multiple factors confluence is not something to give you nightmares at night. It’s just an opportunity to cash in on several price signals going at the same time along multiple sectors on the forex charts. So there is no need to be scared.
Til next time take care.
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