Confluence: A Forex Buzz Word or a Key Component of Successful Trading?

Filed under: Learn Forex Trading |

If you have been reading some of the forums or web-pages online that discuss forex trading, then you have probably heard of this word  “confluence”, which is often banded about in such places. “Confluence” means: “A flowing together of two or more streams, rivers, or the like”. In forex, it is used to refer to when two or more signals all point to the same thing. Let me give you a couple of examples…

 

Let’s say that price has hit a strong level of support/resistance. This is our first level of confluence. It has also formed a pin bar, rejecting this level. This is our second level of confluence. To add to that, the pin bar rejection is also going in the direction of our long-term trend. This is our third level of confluence. And finally, the level is also a 50% Fibonacci retracement area. This is our fourth level of confluence and with this many signals all telling us the same thing, we should be taking the trade.

 

Another example could be that price is moving down in a strong trend. Price retraces ever so slightly to our 8-day exponential moving average and then forms a pin bar, rejecting this moving average and going in the direction of the trend. This is already a confluence of signals, as we have the trend, the price action signal, and the moving average rejection. If we added to this a previous level of support/resistance in the market, then we would have a very strong amount of confluent signals to trade off.

 

So to answer our question, yes, confluence is an important concept in forex trading. It has become something of a buzz word, but if you know what it is and how to use it properly, then it can be an important tool in our trading arsenal.

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