There are many tools and concepts used in technical analysis such as support and resistance areas, trendlines, Fibonacci levels, swing points, indicators and so on. Sometimes you can find many of those concepts all in one area, and that’s when you get “confluence”.
If you are trader who’s looking for more than a reason to enter a trade, then confluence is something you may want to consider as you get more support from a technical standpoint. This way you may find strong areas and decide that if those areas fail, then it’s better to look for other entries. So, this can help limiting your risk.
In the chart below you can see an example on confluence in play. The price gets to an area where there is a long term 21 SMA (simple moving average), a previous swing point level, a Fibonacci 61.8% level, and the short term 8 SMA is below the long term SMA confirming a downtrend.
In such a case, you can simply enter a trade when the price gets to that area and place a stop loss somewhere above the zone that is not too close not too far from it. At that point, your trade may either work out with the price starting its downward move or the price may just break your zone and keep on rising giving you the chance of cutting out the trade, as it didn’t play out as you expected.
Never use technical analysis as the sole reason to take a trade. You need to have a fundamental view on the trade to give you the direction, and only after that use technical analysis to structure it.
This article was written by Giuseppe Dellamotta.