What are Confluences?
Crossing support and resistance lines meet at so called convergences or confluent areas. Is there anything significant about these areas? Do they create the potential for stronger support and resistance? And therefore could they signal potential price reversals? There are plenty of examples of forex traders who use them (here).
If we just think of two lines meeting, there are three basic types:
- Rising: Bullish meets bullish line
- Falling: Bearish meets bearish line
- Flat: Bullish meets bearish
The diagram above shows the three simplest cases.
You can of course have confluence where three, four or more lines meet. See this chart for example. In that case, the thing to do is just look at the most dominant lines.
Finding Confluent Areas
Confluence zones can be the meeting of any type of resistance or support level. That could be a trend line, a pivot level, or a Fibonacci line. Obviously if you draw all such lines on a chart you could end up with hundreds of potential confluence zones.
So at a given point in time, the ones of interest need to meet three conditions:
- Crossings of the stronger support/resistances,
- Happening in the near future, &
- Near enough to the current price level.
In forex, support and resistance are most often straight lines. That makes, finding nearby confluence areas quite easy. You just extend the lines to the front of the chart and see where they cross. You can of course use an indicator to do the job for you.
So the good thing is we can forecast in advance where the lines will meet. And these could mark potentially hidden support or resistance zones. The next question is then are they any use?
Do Confluence Zones Mean Anything in Forex?
It’s always possible to examine a chart and find places where the market agrees with your analysis and ignore places where it doesn’t.
So the only objective thing to do is look at past data and study how the market behaved.
To do this, we’ll look at five major currency pairs over the past two years. The chart used will be the fifteen minute chart. That’s M15. This is a rather arbitrary choice. A four hour or daily chart would probably be better but there would be fewer confluence areas to examine.
On these charts, the breakout direction following on from any confluence area was measured. The table below shows the data for all detected rising confluence zones (bullish/bullish).
For example, on USD/JPY there were eight confluent areas. Of these, in one the market move afterwards was upward. For the remaining seven cases the market moved down after passing the confluence area. Overall, the ratio was 39 down to 35 up.
So on average, the market moved down 52.7% of the time after entering a rising confluence zone.
The next table shows results for a bearish/bearish confluence zone.
Across these currency pairs there was a 59.7% chance that an upward breakout would follow on from a bearish/bearish confluence zone.
Is Confluence Trading a Viable Strategy?
The data above isn’t conclusive since the numbers are quite small. There’s also a lot of variation between different currency pairs. But some currencies seem to buck the trend while others follow it. And different time frames will obviously give different results.
Two rising bullish lines usually meet in an uptrend. So the meeting lines will create a zone of resistance when the price is beneath it. When the price hits this it may react with a downward correction.
Likewise, two bearish lines will often meet in a downtrend. So when those lines meet it will probably create an area of support. Therefore the price will probably rebound upwards.
So from this analysis, confluence zones can be useful, in predicting areas where the market may change direction. Though it’s probably more effective when combined with other techniques like trend following.