To be successful in foreign exchange trading, you need both intuition and experience. Technical analysis is essential in forex trading, and support and resistance zones are the main components of it. They offer insights into possible future price movements. When the traders use a number of techniques to spot these levels, something called ‘confluence’ occurs. Confluence can point out the high-probability trade zones. Forex confluence trading can improve your chances of success in foreign trading considerably.
Understanding Confluence
Confluence occurs when you spot that a trade setup, using various technical tools, is indicating a similar directional price movement. Here, past price trends are analysed to make price movement prediction.
Support and resistance are the building blocks of congruence. Support is the area on the chart below the current market price. At this place, buying is strong enough to temporarily stop or reverse a downward trend. Resistance, on the other hand, is the area on the chart above the current market price. Here, the selling pressure may temporarily stop or reverse an upward trend. Technical tools that overlap to have confluence include horizontal levels, trendlines, and Fibonacci retracements.
The horizontal lines are static levels like moving averages or pivot points. Trendlines are diagonal lines that connect swing highs and lows that show the strength and direction of a trend. Fibonacci retracements are derived from the Fibonacci sequence and show the potential reversal points in the forex market. Common levels of retracement are 38.2%, 50%, and 61.8%. When a Fibonacci level like 50 intersects with a previous horizontal level or a trendline, then it creates a confluence zone.
Why Is Forex Confluence Powerful?
Confluence takes place when multiple technical indicators or price levels meet each other, resulting in a high-probability trade zone. There are trendlines that act as support/resistance, changing with time and showing the direction and momentum of the market. The horizontal levels act as static and horizontal price levels where buyers or sellers show strong interest. When a trendline intersects, you will know the market direction. When this line intersects a strong horizontal level, then it acts as a confirmation that the area is reliable.
The Trendline And Support/Resistance Strategy
Combining support/resistance with trendlines can get you a 80% win rates and it all depends on forex confluence trading. It is the alignment of many technical signals at a single critical price area. If you stack technical elements such as trendlines, that is, the diagonal ones, and horizontal levels or the static ones, then the probability of a successful trade increases significantly. This is because these lines filter out the low-quality and false signals.
This strategy looks out for pullbacks aligning with diagonal and horizontal support/resistance. To apply this strategy, you need to use daily or 4-hourly charts to find out the primary trend that can be an uptrend or a downtrend. Then draw the trendline. In an uptrend, you need to connect at least three significant rising lows. In a downtrend, you need to connect to at least three lower highs.
Next, you should find out horizontal support/resistance zones. Just locate the areas in which the price was reversed before. Then wait for the price to pull back to a confluence zone, that is, the area where the trendline and horizontal level meet. You should place the stop-loss a bit below the confluence zone in case of a long trade (buy) and above the confluence zone in case of a short trade (sell). Then set targets at the next support/resistance level that seems logical.
One of the main reasons for high-rate success of this strategy is that you can do multiple timeframe analysis. The strong bounces from the confluence zone also show higher trading volume.
Conclusion
You can think of the indicators used in forming the confluence zone as market experts. Imagine how confident you will feel if all the experts agreed on the direction the market is going. Confluence has a positive emotional impact as well. If you use the power of confluence, you will stop and wait for several confirmations instead of making any hasty, bad moves. You can stay cool even under pressure or volatile market conditions. Thus, you will make a sound judgment to increase the chances of profits.
