If you look up the word ‘ confluence ‘ in the dictionary, you will see that it means:
“The coming or flowing together, meeting or gathering at one point”.
This definition is also consistent with how we use confluence in trading. We would like to see multiple factors coming together or meeting/gathering at one point on the chart, supporting the idea of a trade/entry signal.
The more confluence a particular trade setup has, the more likely it will become. Waiting patiently for the right price action setup is how you Trade like a Sniper and how you increase your chances of success in the markets.
You can make a living just trading one or two very clear/reasonable trade setups every month, when your account is big enough. However, don’t worry about that right now, just worry about learning how to trade well, and good trading means you wait and wait a little bit more, then when setting up price action logical appearance, you confidently pull the trigger.
Ready to check out some examples? Let’s go…
How to trade with confluence
It’s time to put together everything you’ve learned so far. Trading confluence is when you put all the pieces of the ‘puzzle’ together.
I have a very simple formula to help you remember how to trade with confluence, I call it ‘TLS’ or Trend, Level, Signal…
1. Identify the trend or trend of the market. If there is no clear uptrend or downtrend, then you may have a sideways trend in the market. If it is a well-defined good trading range, then we can consider range trading as we discussed in Chapter 3 of this course.
2. Identify important chart support and resistance levels and mark them on your chart. You can also include the 8/21 EMA daily chart as levels, as well as 50% retracement levels and event zones. All of these count as ‘levels’.
3. Look for clear price action entry signals that match your market trend/trend from the levels in the market. The market levels you align with each other, the better the trade setup and the more ‘confluence’.
So when in doubt, remember ‘TLS’ and ask yourself if the setup you are thinking about trading makes sense in the context of Trends, Levels and Signals Daily Charts (it has must be a clear/well-defined signal)
Here’s a quick list of some of the key elements of confluence you should look for:
- An uptrend or a downtrend ; a strong trend is an element of confluence in and of itself.
- Static (horizontal) support and resistance levels. These are “classic” horizontal support and resistance levels that typically connect a high with a high or a low with a low. The ‘major’ support/resistance levels on the daily chart are the best.
- Exponential Moving Average . I use the 8 and 21 day EMAs on the daily chart to help identify trends and identify dynamic support and resistance. Both the 8 and 21 EMAs are factors or levels that can add confluence to a price action setup.
- Event areas. Event zones are levels in the market where an important price action event occurs. This could be a strong directional movement after a price action signal formed, or it could simply be a rejection of a level followed by a strong directional movement… some “event” Important needs to happen at a certain time in the market, we can then consider this an event zone or level. You can learn more about event areas in Chapter 8 of this course.
- 50% retracement level. I personally watch around 45% to 60% retracement for another confluence factor. I don’t get into all of the other Fibonacci extension levels because I think they’re too arbitrary and messy to be usable. Typically, most of the major moves in the market tend to be around 50% retracement at some point after they form. But all the other Fibonacci levels are simply a case of “if you put enough levels on your chart, some of them are definitely hit…”, in other words, they are more messy and confusing than that. relevant or real.
An important note on the ‘quality’ of price action signals …
The definition and form of a commercial setting can also contribute to its confluence. Meaning, the better and more ‘perfect’ a setup looks, the more confluence the setup has. What we are looking for is a clear/well formed price action signal. There will be many signals you see that look like they could be potential trades, but less fall into the ‘painfully obvious’ type of trade setup that if you don’t do it, you’ll get really angry and frustrated. feel stupid that you did t…THIS are the best signals to trade.
What you want to see is a well-defined price action signal. I’ve given you many examples of these in previous chapters, so check back if you need to refresh your memory. I’m basically talking about a pin with a clear tail on it and a very small real body on it that just ‘looks perfect’, a fake looks ‘perfect’ with a nice long pin like fake bar break or a nice looking fake two bar breakout, or a small/tight inside bar signal on the daily chart time frame. Tail bars can also be good signals to trade, ideally you want a nice long tail on the best tail bar reversal trades.
More importantly, you want to see one of these signals form with the GUIDE. When I see two or more factors of confluence as discussed above, coming together, I call this a ‘hot spot’ in the market.
For example… if we get a strong downtrend and then we see the market move back to horizontal resistance in line with the 8/21 day EMA resistance, I would consider that a ‘hot spot’ and start looking for price action signals there, on the 1 hour, 4 hour or daily chart time frame. This is just one potential scenario… there are many more, let’s take a look at some examples…
Example of trading with confluence
Let’s take a look at the confluence factors that support trading signals in the chart below:
- The first thing we noticed was an overall uptrend in the market. So any buy signal that forms has the weight of uptrend support with it.
- Next, we see a horizontal level through around 1.6655.
- We also have 8 and 21 day EMA classes to track.
- Note the clear pin bar buy signal that has formed at the ‘hot spot’ in the market… the intersection of all three confluences; uptrend, horizontal level and EMA. When this well-defined signal forms with the weight of all three of these confluences, it is a clear and high-probability trade to jump into…
The next example below is very similar to the above example:
- The first thing we noticed was an overall uptrend in the market. So any buy signal that forms has the weight of uptrend support with it.
- Next, we see a horizontal level through around 1.5422.
- We also have 8 and 21 day EMA classes to track.
- Note the clear pin bar buy signal that has formed at the ‘hot spot’ in the market… the intersection of all three confluences; uptrend, horizontal level and EMA. When this well-defined signal forms with the weight of all three of these confluences, it is a clear and high-probability trade to jump into….
Find reasonable price action setups that align with the underlying market trend
In the chart below, we first look at an example of identifying a fundamental/dominant market trend on a daily chart, then we look at a chart showing price action signals. reasonable in line with our trends.
- The first thing you want to do is zoom out your chart so that you’re looking at daily chart price data from the past 6 months to the year.
- Then you just have to observe what the dominant trend or trend is. If you see the market moving higher, then you are in an uptrend, if it is trending lower it is a downtrend, and if it is range-bound, then you are trending sideways.
- Our market trends tell us what kind of signals we want to look for and focus on. An uptrend means we are looking for a buy signal, a downtrend means a sell signal, and a sideways trend can be a buy or sell signal from trading range boundaries.
We have zoomed in on the chart above and we are now looking at a bullish confluence bullish reversal bar buy signal forming in line with the sideways trend of the trading range this market is in. …
- Note, whether a particular signal is confluent or not, depends on the context of the market when it formed.
- The bullish reversal bar below is a confluent buy signal as it formed at the key support of the trading range and since the market is range bound, we are trending sideways.
- The reversal bar with the bottom tail also has good definition; a nice long tail indicates a strong rejection of lower prices… this adds weight to the signal and can be seen as another element of confluence.
Conclusion
I hope that you have a better idea now if ‘trading with confluence’ means. Trading with confluence is a kind of transaction ‘filter’; if a trade has little or no confluence, then deliver it.
The most obvious trading signals form at confluence ‘hot spots’ in the market, which will tend to ‘jump’ away from you once you’ve finished this course and got some phone time… These are the transactions you want to make.
Most traders overtrade, and most lose money… there’s a connection there, it’s not just correlation. Overtrading is often the result of poor execution of trade setups with no confluence behind them. Don’t be one of these traders, learn to patiently wait for the right price action signals and you will be much more profitable in the long run. REMEMBER: Trading is a marathon, not a sprint! NO ONE cares if you are profitable after a week or a month or two, but when you start bringing in profits every year, then people will start to stand up and take notice. You wouldn’t get to this point by making setups that look like ‘fences’ with no confluence behind them.