Trading Confluence

Hello all, I hope everyone had a good trading day. Yesterday I spoke of confluence and I’m not sure that I discussed this much. Confluence basically means the act or process of merging. In trading confluence, you look for several things that come “together” to give you an idea that price may act a certain way. I have a great example of this in my trade I made today. Basically the reason confluence works, is because the market as a whole has thousands of traders making decisions and trading their own strategies, including large financial institutions. If there are several indications that the future price will rise/fall, then more traders will likely notice this as well and tip the scales of supply and demand. Think of the market as a sea of traders, all of them individually make up the overall direction of the market based on what they do. If many of your “strategies” you see on the chart line up, and they all indicate price will go up (or down), you can enter your trade with higher probability because more traders will see what you see. Of course you must do your part in practicing and getting a feel for the market. You can’t simply be taught in a short time how to trade successfully, and it takes screen time and persistence.

AUD_USD 5min 1-30-13

My trade for the day was with the AUD/USD pair. Price was in an overall uptrend on the 5 min chart, but was showing signs that the bears were starting to push back, as you see by the recent ranging action. There weren’t higher high’s and higher lows, and price was respecting and bouncing off the 1.04735 price level. So I waited for some confluence and price began to make a sharp turn down and reached the 180 day EMA and stalled. On the next candle price didn’t continue to go lower than the previous candles low, and formed an bullish inside bar. I waited for the next candle to form to see if price would continue down or turn back up. Once price broke above the high of the previous candle, I looked at my 20EMA, 180EMA, 365EMA, Value Chart, and Fibo that I had previously drawn. All of these indicated price would rise, so I placed a call. The trade was ITM by about 4 pips.

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