Tag: RSI

Confluence is a term that is often used in geographical circles, but it is also used when discussing aspects of forex trading as well. In simple terms confluence refers to two things meeting or coming together, and this is commonly used to describe scenarios where two or more technical indicators come together.

So why is this important?

Well you will rarely see it being mentioned in any forex course, but it is important because you often get some very good trading set-ups when a few of these indicators come together. To digress for a second, some traders use this term to describe situations where two indicators give the same signals, for example when both the RSI and Stochastics are above the 80 level and therefore overbought. However I like to use the word confluence in the truest sense of the word to describe situations where two similar indicators come together on the charts.

One example of this would be where you get a situation where there is a key fibonacci level very close to the daily pivot point. One of these indicators alone can often act as a strong support or resistance level, so two together will give you an even stronger level of support or resistance.

Another good example, and one I look for quite a lot in my own trading, is when several moving average indicators come together on the charts. For instance when the 5, 20, 50 and 200 period exponential moving averages come together and are all very close to each other.

When this happens it signals a period of consolidation, but more importantly it signals that there could a big breakout coming in the near future. As soon as the price breaks out of this range and the short-term moving averages start heading higher or lower, you should consider opening a new position in the same direction because you often get some big price moves.

So to sum up, confluence in forex trading often refers to two or more technical indicators coming together. Successful forex trading is all about finding high probability set-ups, and one of the best signals you can get is when you get multiple moving averages coming together, because the end result is that you often get a big breakout when this period of consolidation is over. However there are lots of other ways you can use confluence to find decent set-ups. This is just one good example that I use myself.

A common approach to forex trading is to play with small stakes and target large price moves in the region of 50-200 pips. Indeed I trade this way myself using my main 4 hour trading system. However an alternative approach is to increase your stakes and look for much smaller price moves. That way you only need to find one decent trade per day if it generates around 10 pips, for instance.

It’s not that easy to do, but you can achieve this target if you employ a sound trading strategy. The best approach is to concentrate only on the major currency pairs (such as the GBP/USD, EUR/USD, USD/JPY, EUR/GBP and GBP/JPY, etc) and look for pairs that are trending strongly upwards or downwards during a given trading session.

You simply look at say the 1 hour chart of all of the major pairs and see which ones are moving strongly upwards or downwards. Then once you’ve done that you can use the shorter time frames to get a good entry point.

The best strategy is to find out which currency pairs are moving upwards on both the 1 hour and 15 minute charts, and then hone in on the 5 minute chart. You want to wait for the price to start moving sideways or downwards on this shorter time frame before turning upwards again, because this is an excellent sign that the established trend is set to continue, and therefore likely to net you at least 10 points or so if this is your target.

Many intraday traders use this type of strategy and for good reason. If you know there is a strong trend in place, then the short-term chart will present you with some decent trading opportunities, particularly near the beginning of a particular trend.

Therefore it’s fairly easy to generate a safe 10 pips every day, particularly if you use a few technical indicators to help you. For example you could use moving average crossovers, or you could wait for the RSI and/or stochastics to become oversold and then go long if there is a long term upward trend in place.

There are lots of methods you can use but the point is that if you always trade in the direction of the overall trend, then it is fairly easy to generate consistent profits. You should find that you can easily find one outstanding trading opportunity every single day across the various different currency pairs. After all you only need to generate around 10 pips per day to make a decent living from forex trading.