The word ‘confluence’ means combination, conjunction or putting several things up together. We can use the same strategy in forex trading with multiple tools or indicators. It is like merging a set of good strategies into one.

Traders normally use indicators, oscillators or price action strategies for discovering profitable trade opportunities in the market. Importantly, the more logical confluence strategies you add to your trades, the more profitable your trade becomes.

Let’s say you are trading based on a price action strategy and you add support and resistance or market key levels to achieve better accuracy of your entries. This can be called a confluence setup, and you can still add trend lines to give your setup more weight.

To successfully use the power of confluence for entering trades, it’s important you start by identifying the prevailing market trend.

You need to understand whether the market is trending upwards, trending downwards, or ranging/sidelining. Doing this will enable you make informed trade decisions.

Thereafter, you can start looking for a price action signal that matches the market trend.  You’ll need to identify whether the signal is with the trend or against the trend. Trading against the trend is really not a good idea.

Once you find a profitable price action signal tallying with the trend, you may watch for support/resistance or key market levels because the market may turn around or start range trading at such levels.

If you are trading using such combination of strategies, then you are a confluence trader. You may use other indicators, tools or oscillators to add more confluence to your trade.

Let’s look at some examples of confluence entries.

Example 1

(You can click on the image to enlarge it)

The above GBPUSD weekly chart comes with some confluence trading opportunities. We’ve marked the market key levels or support/resistance line (A, B & C). Price was rejected from the resistance level for the second time, as expressed by price action (S1).

Later, price started to fall for the second time (S2) after a retrace from the key level (B). We’ve connected S1 and S2 through a trend line. This trend line indicates that a downtrend has been initiated.

At a point (S3), price was rejected from the trend line again, confirming the price action, which is tallying with the market trend. You can go for a short order from here.

Next, price broke the key level B successfully and started to fall again; consequently, it resumed the trend (S4). You can enter a short order again from this level, since price fell all the way to the next market key level (C).

Interestingly, a trend line, price action, as well as market key levels have defined all these opportunities. As earlier pointed out, trading with such combination of strategies is what is called confluence entries.

Example 2

On the above GBPUSD daily chart, we have created another confluence set up by combining support/resistance, price action and RSI (Relative Strength Index).

RSI over 70 is considered as overbought condition and below 30 as oversold condition.

As can be seen on the above chart, price was rejected (S1) from the resistance level (A) while RSI went above 70 (R1), expressing an overbought condition in the market. This exposes a confluence short opportunity.

Secondly, price was also rejected at (S2) from the same resistance level (A), and at this time again, RSI moved above the overbought condition (R2), offering second short opportunity. Price later moved down to the next support/key level (B).

Example 3

On the above GBPUSD daily chart, we’ve used a 50 EMA (Exponential Moving Average), support/resistance, as well as price action to come up with a powerful confluence entry.

The moving average works as a dynamic support or resistance level. Initially, price was rejected and sunk downwards from 50 EMA at (1, 2). However, making a sell entry at such an area may not be a good idea, as support (B) was very near to the price level.

As was mentioned earlier, price often turns around from key market levels. Here, the same thing happened, since price bounced back from the support level (B) twice (3, 4), before later moving up and using the 50 EMA as support (5).

This confirms that price is likely to continue moving upwards, and presents a perfect opportunity for a long entry. As seen on the chart, once price bounced off the 50 EMA, it traveled all the way to the next resistance (A).

Conclusion

Confluence entries not only increase the profitability of your trades but also filter trading signals for you. You may discover numerous trade signals in the market but most of them may not yield the intended results.

Therefore, ensuring that your signals pass every criteria of your confluence entry is important to achieving success in forex trading. As such, you may have reduced trade entry quantities but with better, quality results.