Welcome to the conclusive part of our Strategy Smarts series, a set of practical trading templates expanding on concepts from our previous Day Traders Toolbox and Power Patterns series.
In this final instalment, we introduce the concept of 3-Step Confluent Zones designed to add some precision, discipline, and consistency into your trade entries.
I. Confluence: The Power and Balance
Confluence in trading aligns multiple factors to signal market moves, acting as a quality filter for trade entries. While it reduces overtrading and prevents reliance on a single indicator, excessive confluence might limit entry signals, hindering learning and skill refinement.
Achieving a balance between confluence and signal quantity is crucial. The goal is to create a nuanced approach, harnessing the power of confluence without missing valuable opportunities.
II. 3-Step Confluence Zones Explained
A 3-step confluence zone demands three components for an entry signal: a price pattern, a key market level, and a supporting technical indicator.
1. Level
Identify crucial market levels like support, resistance, or Fibonacci retracement levels, pivotal for defining entry points and risk management across various trade types.
2. Indicator
Utilise indicators that complement your chart pattern:
· Reversal Patterns: RSI, Keltner Channels, VWAP Bands
· Breakout Patterns: Volume, MACD
· Trend Continuation Patterns: Moving Averages, Anchored VWAP, Volume
3. Pattern
The price pattern acts as the catalyst for trade entry. It could be a single candle or multiple candles forming recognised patterns, backed by confluence at the chosen indicator and responding to a market level.
Select one from each group to meet the 3-step confluent zone criteria
Past performance is not a reliable indicator of future results
III. Real-World Examples
The 3-step confluence zone technique can be used when trading any market on any timeframe, we’re simply combining the confluence of a price pattern with a level in the market and an indicator.
Let’s take a look at some real-world examples:
Example 1: EUR/USD Hourly Candle Chart
In this example, a fakeout reversal pattern occurs at a clear level of horizontal support. Bullish divergence on the RSI indicator provides the additional confirmation which meets our 3-step confluent zone criteria for entry.
Past performance is not a reliable indicator of future results
Example 2: Tesla (TSLA) 1min Candle Chart
This is a day trade example in which a fakeout occurs at the previous day’s low (PDL) and price is outside of the lower VWAP band – meeting our 3-step confluent zone entry criteria.
Past performance is not a reliable indicator of future results
Example 3: Gold (spot price) Daily Candle Chart
Here’s a recent swing trading example in the gold market displaying a decisive descending channel breakout at a significant support level coinciding with VWAP anchored to previous lows.
Past performance is not a reliable indicator of future results
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
In this final instalment, we introduce the concept of 3-Step Confluent Zones designed to add some precision, discipline, and consistency into your trade entries.
I. Confluence: The Power and Balance
Confluence in trading aligns multiple factors to signal market moves, acting as a quality filter for trade entries. While it reduces overtrading and prevents reliance on a single indicator, excessive confluence might limit entry signals, hindering learning and skill refinement.
Achieving a balance between confluence and signal quantity is crucial. The goal is to create a nuanced approach, harnessing the power of confluence without missing valuable opportunities.
II. 3-Step Confluence Zones Explained
A 3-step confluence zone demands three components for an entry signal: a price pattern, a key market level, and a supporting technical indicator.
1. Level
Identify crucial market levels like support, resistance, or Fibonacci retracement levels, pivotal for defining entry points and risk management across various trade types.
2. Indicator
Utilise indicators that complement your chart pattern:
· Reversal Patterns: RSI, Keltner Channels, VWAP Bands
· Breakout Patterns: Volume, MACD
· Trend Continuation Patterns: Moving Averages, Anchored VWAP, Volume
3. Pattern
The price pattern acts as the catalyst for trade entry. It could be a single candle or multiple candles forming recognised patterns, backed by confluence at the chosen indicator and responding to a market level.
Select one from each group to meet the 3-step confluent zone criteria
III. Real-World Examples
The 3-step confluence zone technique can be used when trading any market on any timeframe, we’re simply combining the confluence of a price pattern with a level in the market and an indicator.
Let’s take a look at some real-world examples:
Example 1: EUR/USD Hourly Candle Chart
In this example, a fakeout reversal pattern occurs at a clear level of horizontal support. Bullish divergence on the RSI indicator provides the additional confirmation which meets our 3-step confluent zone criteria for entry.
Example 2: Tesla (TSLA) 1min Candle Chart
This is a day trade example in which a fakeout occurs at the previous day’s low (PDL) and price is outside of the lower VWAP band – meeting our 3-step confluent zone entry criteria.
Example 3: Gold (spot price) Daily Candle Chart
Here’s a recent swing trading example in the gold market displaying a decisive descending channel breakout at a significant support level coinciding with VWAP anchored to previous lows.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.