Learn Forex – Seeking Confluence when Trading Forex
Learn Forex / Forex Books (FXpath.com) – Following is an excerpt from my 2nd book, Essentials of Technical Analysis for Financial Markets (John Wiley & Sons, 2010), in which the important subject of seeking confluence in trading is discussed:“The vitally important concept of confluence within the realm of technical trading may mean different things to different traders. The basic idea, however, is that multiple technical confirmations make for a stronger trade rationale and therefore a higher-probability trade. Confluence is simply more than one technical indication providing a basis for any given trading action. This could be any combination of two or more technical factors pointing in the same direction. Some examples of these technical factors include support/resistance levels, trend lines, Fibonacci levels, pivot points, Western bar patterns, Japanese candlestick patterns, moving averages, and volatility bands.
It should be noted that seeking confluence for a given trade should not be an exercise in paralysis by analysis, where all stars need to be perfectly aligned before the afflicted trader can pull the trigger on the trade. Paralysis by analysis can be a debilitating condition that hinders traders from making otherwise good trading decisions. Rather, seeking confluence is simply the act of finding some additional, reasonable confirmation(s) for reinforcing the rationale for a trade. This is a key component of high-probability technical trading and analysis.
Patience is of the utmost importance when seeking to trade with confluence. This is due to the fact that potential trades with only one rationale are far more plentiful than those setups that have a confluence of more than one rationale. If one has the patience to wait for confluence to develop before taking any trades, however, the success probability for those fewer, select trades increases significantly. Patience is important when waiting for confluence to develop also because the confirmations are not always simultaneous. Rather, confluence can often develop in a consecutive manner. For example, in a breakout confluence where price breaks out above a certain horizontal price resistance level, a confirming breakout above a separate downtrend resistance trend line may occur a few bars (periods) later. But this breakout could still be considered a potential trade setup with confluence, even though the confirming break occurred after the initial break, instead of simultaneously.
Some common examples of potential trade setups that can be considered to have a confluence of technical factors are presented next.
- Bounce up off a horizontal support level coinciding with an uptrend support line
- Bounce up off a 38.2 percent Fibonacci level coinciding with both a daily S1 pivot point and a horizontal support level
- Bounce down off a long-term 61.8 percent Fibonacci level coinciding with a short-term 38.2 percent Fibonacci level
- Bounce down off a downtrend resistance line coinciding with both a horizontal resistance level and an R2 pivot point
- Breakdown below a major horizontal support level coinciding with a head-and-shoulders neckline
- Bounce up off a key moving average coinciding with an uptrend support line
- Breakout above a pennant pattern coinciding with a major resistance level
- Bounce up off a newly formed bottom confirmed by a hammer candle coinciding with a major previous support level
- Bounces off Bollinger Bands’ lower and upper standard deviation bands coinciding with strong horizontal support and resistance within a sideways trading range
These are only a few examples of the countless potential combinations of confluence factors that can be found on any financial market chart. Overall, confluence can be an extremely important contributing factor to fostering prudent, high-probability technical trading.”
- Excerpted from Essentials of Technical Analysis for Financial Markets (John Wiley & Sons, 2010)
James Chen, CTA, CMT (bio)
- Click here for my book, Essentials of Foreign Exchange Trading (Wiley).
- Click here for my book, Essentials of Technical Analysis for Financial Markets (Wiley).
- Click here for my video DVD set, High-Probability Trend Following in the Forex Market (FXstreet).
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awesome stuff, mr. chen. thanks for all your writing and all your webinars helped me out a lot. nice new ebook. always look for confluence in all trades. thank you, cal