What Exactly Is Confluence?




CategoryTrade Theory

PublishedMar 4, 2023, 6:32 PM EST


What Exactly Is Confluence?

Confluence is defined as a situation in which two things come together or happen at the same time or a coming or flowing together, meeting, or gathering at one point. In trading, confluence is multiple trading schools of thought meeting at a price and all being in agreement that price should react, as a buy or sell, in that area.

We will break confluence into 2 categories: Trader Confluence and Additional Confluence. We MUST have Trader Confluence when we trade and we want to have Additional Confluence as well.

Trader Confluence
In the example we can easily see an area of trader confluence where multiple schools of trading would be interested in selling.

1. Break and Retest traders have identified a level of support that has been broken and are waiting for that level to be retested as resistance in order to sell.
2. Trend Line traders have a trend line drawn by connecting 2 prior swing highs and are waiting for a 3rd touch and bounce from the trend line to indicate a time to sell.
3. Fibonacci traders see that price has made an impulse and is now retracing to the 50% - 61.8% which for them is a popular retracement level to enter a trade.
4. Moving Average traders using the 50 SMA would see price below the 50 SMA and think that it’s a bearish market and are waiting for price to reject from the 50 SMA to enter a sell.

These 4 types of traders are focused on the same price at roughly the same time which makes this sell trade have a high probability of success, since so many traders would be selling here for their own reasons. Each of these traders has 3 trader confluences from the other traders supporting their trade decision. All of which pushes price down and would make an ideal place to sell. This is the market having a consensus that this is the place to sell.

You don’t want to be alone in your trade idea especially in the face of multiple contrary trader confluences against your trade setup. If the price action shows that there would be multiple types of traders looking to buy at a given price, you don’t want to be a seller at that same price. You’re chances of being profitable increase when you only trade where there is supporting trader confluence and the more trader confluence the better your odds.

Before entering a trade, always have at a minimum 2 trader confluences supporting your trade. Including your own school of thought having at least 3 trader confluences should be the goal for every trade that you enter.

Other trader confluences come from chart pattern traders, candlestick traders, moving average crossover traders, harmonic traders, Elliott wave traders, supply and demand traders, support and resistance traders, and even smart money concept traders.

Additional Confluence
Consider additional confluences as bonuses or the cherry on top. These are not necessarily required but make your trade setup stronger if they are present. Additional confluences should not be a replacement for the minimum 2 trader confluences that you need to enter a trade.

Common Additional Confluences:

  • Divergence
  • Dollar index correlation
  • Commitment of Traders (COT) reports
  • Oscillating indicator overbought/oversold conditions
The most important additional confluences are Divergence and the Dollar index correlation for USD pairs.

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