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Confluence Trading: The Power of Technical Analysis

Updated: Mar 27, 2023




As a full-time trader and educator at Spitfire Traders, I believe that technical analysis is the key to consistently profitable trading. In particular, I focus on a trading strategy known as confluence trading. In this article, we will explore what confluence means in trading, how confluence trading works, and why it is such a powerful approach.



What Does Confluence Mean in Trading?


Confluence in trading refers to the intersection of multiple technical factors that suggest a high probability of a market move. These factors can include:



When these technical factors align, they create a confluence of signals that can provide traders with a strong trading opportunity.



What Is Confluence Trading?


Confluence trading is a trading strategy that involves looking for areas on a chart where multiple technical factors align. When a trader identifies such an area, they will look to enter a trade based on the direction that the confluence suggests. For example, if a trader identifies a confluence of resistance levels near a key Fibonacci retracement, they might look to enter a short trade.



How Does Confluence Work?


The power of confluence trading comes from the fact that it provides traders with a high probability trading opportunity. When multiple technical factors align, it suggests that a large number of traders will be watching that area of the chart. This means that if price approaches that area, there will likely be a lot of buying or selling pressure at that level.


When a large number of traders are all looking at the same area of the chart, it creates a self-fulfilling prophecy. Traders will often place their trades based on the confluence of technical factors, which can lead to a surge in buying or selling pressure. This surge can then create a strong price move, allowing traders who identified the confluence to profit.



What Is an Example of Confluence?


To better understand how confluence trading works, let's look at an example. In the chart below, we can see a confluence of technical factors at the $48,000 level of Bitcoin:




Here, we can see that there are multiple factors that suggest the $48,000 level is an important area to watch:


  1. Value Area High of the composite value range

  2. High of the parallel channel

  3. 1-1 Fibonacci Extension

  4. Fresh High Time Frame resistance level

  5. 0.382 Fibonacci retracement level from the all time high to the current lows

Taken together, these 5 factors create a strong confluence of signals that suggest that the $48,000 level is a key area to watch. A trader who identified this confluence might look to enter a short trade near the $48k level, with a stop-loss above the parallel channel. This was a trade discussed weeks in advance within our educational group, by using confluence, we can plan swing trades weeks or months in advance.



Why Is Confluence So Important?


Confluence trading is a powerful strategy because it allows traders to identify high-probability trading opportunities. By looking for areas where multiple technical factors align, traders can increase their chances of making a profitable trade. Furthermore, because a large number of traders are likely watching these areas, it creates a self-fulfilling prophecy that can lead to strong price moves.


In addition, confluence trading allows traders to reduce their risk. By entering trades based on a confluence of technical factors, traders can place their stop-loss orders in areas where it is less likely that price will move against them. This can help to limit losses and preserve capital.



Conclusion


Confluence trading is a powerful trading strategy that can help traders identify high-probability trading opportunities. By looking for areas where multiple technical factors align, traders can increase their chances of making profitable trades while also reducing their risk. The power of confluence trading comes from the fact that it creates a self-fulfilling prophecy, as a large number of traders are likely watching these areas.


As a confluence trader, I believe that technical analysis is the key to consistently profitable trading. By focusing on technical factors such as support and resistance levels, trend lines, and chart patterns, traders can identify areas of the chart where price is likely to move. When multiple technical factors align, it creates a confluence of signals that suggests a high probability of a market move, providing traders with a strong trading opportunity.


In conclusion, if you're looking to improve your trading strategy, I highly recommend exploring confluence trading. By focusing on technical analysis and looking for areas where multiple technical factors align, you can increase your chances of making profitable trades while also reducing your risk. Remember, the more confluence a level has, the more traders will be watching said level to trade from, which can lead to strong price moves and profitable trades.



 


About the Author



Spitty is a full-time crypto, forex, and stock trader with years of experience in the financial markets. As an educator at Spitfire Traders, his goal is to help his students become consistently profitable full-time traders.


Spitty is a confluence trader who believes in the power of technical analysis. He focuses on looking for areas on a chart where multiple technical factors align to identify high-probability trading opportunities. By using this strategy, Spitty has been able to achieve consistent profitability in the markets.


In addition to his trading and teaching work, Spitty is also a frequent contributor to trading forums and social media platforms, where he shares his insights and analyses with other traders.

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