Confluence happens when many technical indicators generate the same signal, this trading concept is used by price action traders to filter their entry points and spot high probability signals in the market.
It doesn’t matter if you are beginner or advanced trader, trading with confluence is a must, because it will help you focus on quality setups rather than quantity, and it will enhance tremendously your trading performance.
Confluence means combination or conjunction, it is a situation in which two or more things join or come together, for example, if we are looking for a pin bar signal, we need to find other factors of confluence to confirm our entry; we are not going to take any pin bar that we find on our chart.
Factors of Confluence:
The trend: it is one of the most important factor of confluence, this is the first thing that most successful traders look for on their charts, you can’t trade any setup without identifying if it is in line with the direction of the market or not.
A bearish pin bar in a downtrend is more powerful signal than the one in a range-bound market.
Support and resistance levels and supply and demand areas: these major levels have a significant importance in the market, because all big participants watch these specific areas.
Moving averages: i personally use the 8 and 21 moving average, this technical trading tool acts as dynamic support and resistance, and it is a very important factor of confluence in trending markets.
Fibonacci retracement tool: I use the 61% and 50 % Fibonacci retracement to find the most powerful areas in the market.
Trend lines: drawing these lines on your charts give us an idea about the market direction and help us find the most important reversal points in the market.
When you are analyzing your chart, you are not obligated to find all these levels to determine whether the trade is valid or not.
If you can find just one or two factors of confluence that come up together with a good pin bar setup, this is quite enough to make a profitable trade.
For example: an obvious pin bar signal near support or resistance level in line with the direction of the market.
See the illustration below:
In the example above, we have a high probability setup with four factors of confluence.
1- The Trend: the market is trading up which means that we have to follow the trend and look for a buying opportunity.
2-The level: The support level is an important key level in the market.as you can see, price broke out of the resistance level that becomes support and pulled back to it.
3-The signal: The formation of the bullish pin bar after the retracement back to the resistance level that becomes support.
4-Another signal: The rejection of the pin bar from the support level, and the 21 moving average that acted as a dynamic support level.
All these factors work together to give us powerful trading signal to buy the market.
See another example:
The example below shows 4 confluent levels that indicate a powerful trading signal, the first factor is the bullish trend, and the second one is the resistance level that becomes support.
The third one is the 21-moving average that acts as a dynamic support level. and the last factor is the pin bar formation near these levels in line with the bullish trend.
If you adopt this trading concept, you will completely change the way you perceive the market, and you will start trading like a sniper by waiting for the best trading setups to come to you, instead of trying hard to make trades happen.