Forex Trading: Confluence Revisited

Filed under: Learn Forex Trading |

The word ‘confluence’ has increasingly become something of a buzzword in forex trading circles, and it is something that we have briefly gone over before, but it is an important concept and one that requires a little more illumination.

 

The word ‘confluence’ quite literally means “a coming together” of something, and in the case of forex trading, it refers to a confluence of signals that all point to the same thing. For example, one signal might be an RSI divergence, which tells you that the market may be about to turn bearish, another signals might be a support/resistance level, and another signal might be a price action signal (such as an inside bar, or a pin bar). When all these signals come together, it makes your probability of success increase.

 

When I am trading, I try to look for at least three different confluent signals before I initiate a trade. More examples of possible signals include the trend (i.e. an 8-day EMA crossed above a 21-day EMA for long trades, and an 8-day EMA crossed below a 21-day EMA for short trades), a MACD divergence, or a price pattern (such as a double top). But whatever signals you favour and prefer to use, make sure that you have at least three different signals all pointing to the same idea.

 

Many forex traders use confluent signals to inform their trading decisions, and this is because the more signals that you have, then the greater the chance of success. However, you should also remember that no matter how many levels of confluence that you have, you will never have a 100% chance of success, and sometimes, a trade simply does not come off no matter how good the setup looks. All we can do as traders is to tip the balance in our favour, and to give ourselves the highest probability of success.

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