As a technical trader (or using technical analysis), you need to always be aware of as many technical indicators as possible (within reason).
We want to be able to identify possible trading entries, anything that conflicts with it and in consideration of the trade itself, what I refer to as ‘key hurdles’.
These are significant levels of support and resistance. They’re either the objective (where I take profit or partially close) or areas to be reactive at based upon further confirmation (e.g. do I hold based upon the candlestick formation for bigger gains, or conversely close it out).
In the chart above on the D1 GBPUSD, there are of course other levels of support and resistance, but I am only really interested in the obvious ones.
What is technical confluence
Using the same chart as before (with the short position), if we look a little closer, we can also highlight a trendline:
At the time the short position was taken, this is something I highlighted immediately. Factoring in this trend line prior to taking the short position, armed me with information on where price may ‘stall’. Confluence can be defined as the act or process of merging two or more things. In this example above, we’ve witnessing exactly that. A merge between two TA tools: support and an outside touch of a trendline.
Once yesterday’s session closed, we saw a doji like candlestick form. This tells us that there was a level of indecision and that price had reacted to a level I had outlined previously (with the close being above the trendline and support level). Whether it holds is yet to be determined.
Benefits of technical confluence
The more confluence we can find, the more we’re shifting that sensitive equilibrium of risk and reward into our favour. As traders it’s important to be regimental in the way we assess our entries, and overall trade and risk management. Finding areas of confluence like this is gold dust because 9 times out of 10, you’re going to have a reaction and that’s most of the time some serious whipsaw like we’ve seen above, or a strong correction. If the technical confluence is a strong one, seldom will you find that price bolts through it (unless economic data / news just came out!).
Hocus-pocus technical analysis
The art with technical analysis is down to the beholder. It’s important to know what’s popular and universally accepted across all financial markets. If you know that the majority of market participants and analysts consider some aspects of technical analysis, then it’s worth considering in your analysis. Whether it’s for explicit decisions or as a qualitative tool / overlay, it’s really just down to how it fits into your overall strategy.
More importantly, it’s whether you’ve tested the principle and seen enough examples historically to give you the confidence to trust in the principle through good and bad calls. Let’s be honest, nothing works 100% of the time so test, test, test.