Trading confluence is an area in the Forex market where two or more structures come together and form a high-probability zone for buying or selling. It is a bit challenging to understand confluence and the way of using it effectively. Some traders depend on indicators solely for developing a trading zone, while others focus on price action. Then again, some prefer combining both. Regardless of the path you choose, it is crucial to have a thorough understanding of every complementing component.
Remember that confluence areas provide an edge, but it does not guarantee that each trade will produce profitable results. However, if you consider the setups showing strong confluence, it may produce reasonable results on average and you can earn profits. As long as your account keeps growing over the long term, you do not need to be concerned about a losing trade.
How much confluence is enough for trading?
As a trader, you need to know when you have enough confluence so you can trade confidently. To do this, you may need to merge two to five concepts. Traders may designate every trade setup as A1, A2, or A3. The A1 setup is a first-rate trade that is not as regular as A2 and A3 setups. However, setup is more likely to carry more weight regarding the win/loss ratio.
With these points in mind, these are the structures you need to fulfill the formation of an A1 setup:
- Traders need to trade with the trend. Generally, we look at the traded timeframe only for this. Hence, if a 4-hour setup is traded, the trend must be seen painted on this timeframe clearly.
- A credible area of the structure is a must. It means that the trading zone needs to have coverage with a supply or demand area or it must have a support or resistance barrier.
- You also need a psychological number. Most traders already know its importance. Due to this reason, it is important that a full round number or a mid-level number is seen around the area clearly.
- It requires a Fibonacci retractment point at either 61.8% or 38.2%.
- Trendline convergence is another thing that is required. It is important to plot the trendline here. Typically, at least two points are must including the starting base, to be seen before the trendline is drawn.
- Traders need a monthly or yearly opening level. Simply put, these are the price points that are extended into the future from the opening candle of every month and year.
- The last thing required is a clear AB=CD formation. Generally, the waves have little interference. A smooth A-B leg and a distorted C0-D leg are what we need to avoid.
So, a considerable amount of structure is needed for A1 setup. Once an area is formed, it shows all these levels coming together. Then we can expect the zone to at least bounce price unless a high-impacting news event is due to be released at that time.
On the other hand, the A2 setup is a watered-down version of the A1 formation. With the A2 setup, traders do not need to have a trendline or the monthly/yearly opening level. The rest of the structures mentioned above in the list of the A1 section are the same for the A2 to fulfill an entry. Moreover, both the A1 and A2 require showing space so the price can move on to higher timeframes.
The last one is the A3 setup. Generally, A1 and A2 patterns are preferred by traders more. However, when nothing is there on the horizon, it is best to trade A3 setups because of its lower risk. If a level of a round number gives way with room seen for price running, traders can consider trading any retest of that level viewed thereafter. However, according to the way you trade, a bullish or bearing rotation candle must accompany the retest. By rotation candle, we understand a candle bouncing from the level to form a full or at least very near full-bodied candle. It is opinionated that buyer or seller intent is suggested by it. Of course, having these levels bolstered by structures like trendline is also preferable.
What Timeframe Must Be Selected For Trading?
The perfect timeframe for any trader depends most on his/her lifestyle. Traders that have full-time jobs may be able to swing trade only. The most they can take a look at the charts maybe once or twice at most. So, a 4-hour timeframe seems to be a good option for these people. Any lowered than this is considered intraday. On the contrary, if the individual works a part-time job or if he/she is retired, then the person has the option of trading the market intraday. When a trade is not only executed but also liquidated within the same day, it is called intraday. If it is below the hourly timeframe, then it is considered an intraday scale. If you are into this type of trading, then you will need to spend several hours in front of the computer each day. On another note, you can also consider trading long term that involves looking at the charts only a few times per week. However, this is slow. Thus, it is not suitable for everyone.
How to Trade Support And Resistance Confluence?
Support and resistance confluence can help the traders to see areas where swings or reversals may take place. However, you must keep in mind that no form of analysis can predict future price movements accurately. Instead, trading is unpredictable and it is all about possibilities. By viewing a down-trend pause during support or an up-trend stall at resistance, we can only see an area where the reversal in price is likely to take place. Another point is price action that signals potential reversals. As a trader, you should take this opportunity for a potential trade entry that comes with a positive risk-reward ratio as well. In this situation, if you do it right, then there is the possibility of making $2 for every $1 that you risk in the event. By doing this, you can avoid the top trading mistake, which most Forex traders make to end up with financial losses.
Many traders feel that confluence trading areas have a wonderfully strong edge. Without these, being successful in the trading market is difficult. Of course, that does not mean that guarantees success every time. Keep in mind that you need to act and respect the discipline and follow your rules strictly for it to work, which can be hard. However, you can be better by learning and experiencing more gradually.