Do You Know What "Confluence" Means? · Day Trading for Beginners

Do You Know What "Confluence" Means?

I've been watching some technical analysis videos recently, and I keep hearing the term "confluence". I think I sort of knew what it meant, however I asked ChatGPT to explain it to me so I could fully understand it, and I thought the answer was worth sharing as it is quite important for technical analysis.

I heard the term many times while watching videos from a trader called The Great Mattsby (Matt):

https://www.youtube.com/@TGMTrading/videos

Here is the answer from ChatGPT:

In trading, "confluence" refers to the situation where multiple technical indicators or signals align to suggest the same market direction, increasing the probability of a successful trade. When traders mention that various technical indicators are adding confluence, they mean that several independent indicators are pointing towards the same conclusion about price movement. This alignment of multiple indicators provides a stronger signal than any single indicator alone, giving traders more confidence in their decision.

Here's a breakdown of how confluence works with some common technical indicators:

Moving Averages: If the price is above both the 50-day and 200-day moving averages, this can be a sign that the trend is upward. If, additionally, the shorter moving average (e.g., 50-day) crosses above the longer moving average (e.g., 200-day), this is often seen as a bullish signal (golden cross).
Support and Resistance Levels: If the price breaks through a resistance level and at the same time, other indicators also signal a bullish trend, this adds confluence to the idea that the price may continue to rise.
Relative Strength Index (RSI): If the RSI indicates that the market is not yet overbought (e.g., RSI below 70) while the moving averages are also signaling an uptrend, this can provide additional confidence that there is room for further upward movement.
MACD (Moving Average Convergence Divergence): If the MACD line crosses above the signal line and this occurs simultaneously with the price moving above a key moving average, it adds confluence to the bullish outlook.
Volume: An increase in trading volume accompanying a price move can add confluence. For instance, if the price breaks out above resistance on higher-than-average volume, it suggests that the move has strength behind it.

When these various indicators and signals line up, traders see this as confluence, which suggests a higher likelihood of the predicted price movement occurring. This can make trading decisions more robust, as relying on multiple sources of confirmation helps to reduce the risk of false signals.

Hope this helps.

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