This week’s question comes from Mario, who asks:
What is a “confluence” of support or resistance?
This is an excellent question, and the answer can improve your trading performance in a big way. But like all things, it takes practice, patience, and discipline to get it right.
According to Merriam-Webster, the word confluence means:
- A coming or flowing together, meeting, or gathering at one point.
- The flowing together of two or more streams.
Obviously, we’re not dealing with streams here. But the first definition sums things up nicely and the second provides a visual for us to refer to as we progress through this post.
In the world of trading, the term confluence refers to the intersection of two or more key levels or areas of value. These can be trend lines, horizontal levels, and even channels which are really just equidistant trend lines.
These intersections provide some of the best areas to watch for buying and selling opportunities.
In this post, we’ll discuss the concept of confluence as it relates to support and resistance. I’ll provide a recent example and also share some tips on how to avoid a common pitfall when searching for these areas of confluence.
Let’s dig in!
Searching for Intersections
So you already know a confluence of support or resistance is simply the intersection of two or more key levels.
These intersections are usually formed by:
- The crossing of a trend line and a horizontal level
- The crossing of two trend lines or channels, one ascending and the other descending
- Both one and two (horizontal level, trend line, and channel)
The scenarios above make sense because, well, you can’t have two horizontal lines intersect one another.
Or can you?
Technically speaking, horizontal levels can’t intersect, but they can overlap to some degree. Remember that I also favor the use of Fibonacci levels with price action. But we’ll get to that shortly.
For now, let’s just focus on the intersection of a few price action levels. Here’s an example that occurred recently on the USDCAD 4-hour chart.
Notice how the trend line intersects with a horizontal level and channel resistance. This gives us an area with three intersecting levels as opposed to just one standing on its own.
I pay particular attention to areas like this for buy and sell signals.
Of course, there are never any guarantees. The USDCAD may end up blowing right through this confluence of resistance. But the odds of selling pressure developing in the area highlighted in the chart above versus a single level are much greater.
In summary, a confluence of support or resistance is simply an intersection of two or more key levels. The advantage comes down to probabilities. Market participants are more likely to gather around an area that involves two or more factors rather than an area with just one.
Fibonacci Levels Are an Added Bonus
Not everyone is a fan of Fibonacci levels. To be honest, I wasn’t a big fan of them either when I started trading Forex back in 2007.
However, as the years passed, I found that Fibonacci studies tend to compliment price action quite well. Maybe it’s because I rely heavily on horizontal levels, which is what the Fibonacci tool is all about.
But I do have one rule when using the Fibonacci tool; call it a caveat.
That rule is that I never use a Fibonacci study on a blank chart. In other words, my goal isn’t to find new horizontal areas of support or resistance.
Instead, I use it to confirm and even fine tune levels I’ve already drawn. That doesn’t mean I remove a support or resistance if it doesn’t match up with one of the Fibonacci levels.
It does, however, give me a bit more confidence when I see one or more of my predetermined levels line up with a Fibonacci sequence.
As mentioned above, it also allows me to fine tune any predetermined levels. You’ll find that in some cases the Fibonacci tool will identify a “better” placement for a level than what you found on your own. If so, it might make sense to move that level higher or lower as appropriate.
This doesn’t mean I won’t add a level if the Fibonacci study reveals something I may have missed. But my primary goal in using the tool is to confirm and double check my analysis.
For a detailed lesson on how to use the Fibonacci tool with price action, see this post.
Don't Look Too Hard
Trading Forex is paradoxical. On the one hand, more study time and hands-on experience will make you a better trader. The harder and longer you study, the better you become as a trader.
However, there is a stark difference between studying hard to become a better trader and trying hard to find key levels and trade setups. Unlike the former, the latter can get you in a heap of trouble.
Just like favorable setups, you have to let key levels come to you. The best levels should stand out from other less obvious ones. The same goes for areas of confluence.
If you try too hard to find them, you will. That may sound great until you realize that your mind is just showing you what you want to see.
Again, it’s a paradox. There’s an old saying that if you go looking for something you’ll find it. What this means is that if you try too hard to find something your mind will appease you by showing you that very thing, irrespective of whether or not it actually exists.
As a trader, that’s a big problem. The best way to avoid falling into this trap is to stay patient and always second guess your work.
Also, if something doesn’t look quite right or you’re unsure about a particular level or setup, it’s probably best to forget about it and move on to something else.
One rule that can help curb your mind’s appetite for playing tricks is never to spend more than 20 or 30 minutes in front of your charts at a time. After this amount of sitting and staring at price action, it’s usually a good idea to take a 5 to 10-minute break.
To clarify, I’m referring to the time spent identifying key levels. Once you have these levels drawn, it should take you no more than 20 to 30 minutes each day to scan your charts for favorable setups.
If nothing catches your attention right away, you’re probably better off doing nothing.
Always remember that the longer you spend looking at your charts in one sitting, the greater the chance your mind will begin to play tricks on you. So be sure to break up your chart analysis and study time with short breaks to help keep your mind free of distractions.
Looking for intersections of key levels is an excellent way to find high probability setups. These areas of confluence tend to attract more buyers or sellers resulting in a reversal or continuation of the current trend.
The most common type of confluence occurs when a trend line intersects with a horizontal level. These are my favorite areas to watch for buying or selling opportunities.
Perhaps the “best” areas to watch for opportunities are those formed by a trend line, a horizontal level, and a Fibonacci. When you find such a combination, it’s usually a good idea to keep that pair and level on your watch list.
Just be sure you aren’t trying too hard to find these areas of confluence. Remember, some of the best areas to watch for buying or selling opportunities are obvious and therefore require little effort to find.
Your Turn: Ask Justin Anything
I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.
To do that, I need your help.
Here’s what you can do to get involved and have your question answered in next week’s post:
- Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
- Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.