In this article we are going to explain how you can identify good price action trading setups by trading from a confluence level in the market. Price action trading is done without any indicators and involves trading from recurring price patters like pin bars, engulfing bars, support and resistance levels, Fibonacci levels e.t.c
Confluence: Is a point, price or level in the market where two or more levels intersect each other, hence forming a “sweet point” or confluence point in the market. For example a pin bar at a previously established support level, the same level now acting as a resistance level, the trend is also downward direction as the signal and the 50 simple moving average (red) is also acting as a resistance, The blue trendline has also held previously as shown below:
A confluence level is where two or more signals / points / levels intersect.
Examples of factors of confluence that I look for in the markets:
• An uptrend or a down trend; essentially a “trend” is one factor of confluence in and of itself.
- The trend, as shown in the example above it was a down trend, the blue trend line had also been holding.
- The 50 Simple moving average (Red) and the 200 Simple moving average (Black) in the example above the 50 SMA was now acting as resistance.
- Horizontal support and resistance levels, These connect highs to highs and lows to lows, As can be seen above the RED horizontal line was acting as a support level before and now turned resistance,
- Fibonacci levels, although not shown in the example above, if present I try and look for that as well.
- Candle stick patterns, This is essentially what integrates price action trading to confluence level. In the example above we had a pin bar.
The 5 factors of confluence above are just some of the levels that can intersect to form a confluent area in the market, there are also intra-day levels and other factors of confluence that we can watch for.
These are only 5 factors that can intersect to form a confluence level. How I would have traded this is by shorting the pair at the pin bar because of all the above factors. As can be seen the price did actually fall after the pin bar at that level. As is with all systems in forex, this is also not 100% and is just a mere method of increasing probability of getting it right.