When support and resistance lines cross each other they can interact with a trend and cause it to breakout in a different direction. These are called confluence areas. Knowing where they are can help you anticipate breakouts from the main trend. In this post we’ll look at trading trends using support, resistance and confluence.
How to Use Support/Resistance in Trending Markets
When examining a trend we start by locating its longest support and resistance lines. For a long trend you’ll need to zoom out so that most of the chart area is visible.
You can use our free support/resistance indicator to do this automatically. This will mark out all of the lines for you and display the strength of each one.
If you’d rather work without indicators you can do the same by sight. It just takes a bit longer. It’s usually easiest to start from the front of the chart and work backwards.
Looking at the USD/JPY 1 hour chart above, the primary trend is from A to B.
If you examine this line, you can see that over the life of the trend it’s created strong resistance, early on in the trend. Then later on, the price breaks through and up. The line then develops as a strong support. It’s therefore the main support/resistance line for the trend. This is because most of the price action in the trend is happening around this line.
The Importance of Confluence Lines
Trends rarely form in straight lines. If you look at the chart you’ll notice the price is veering up and down as it oscillates around the main trend line.
These price moves create their own trends on a smaller scale. So the next step is to mark off the minor lines of support and resistance. These are the lines where the price is moving away from the main trend line.
When doing this we need to look at trends from earlier on. Strong trends go on having influence for a long time. When their lines of support and resistance cross, they create areas of confluence.
Looking closer at the chart you can see a rising wedge pattern in the middle, marked C. Here the price is trapped between a rising support and resistance line. This forms a “trend within a trend”.
Now if we trace the lines of the wedge backwards in time we see that they lead on from the main support/resistance of a powerful bullish trend. The zoomed view is shown in Figure 2.
This bullish trend is still having an influence on the price. This happens as the newly forming bearish trend meets the support of that earlier bullish trend. This is marked as a confluence on the chart.
After the wedge completes, the trend then falls back to the lower support line. And the bearish trend resumes its course.
Once you’ve marked out the major and minor trend lines, you’ll have a map of where the price is likely to meet support or resistance within the trend in the future.
To do this, you’ll need to draw the lines to the front of the chart. That is, the current point in time. The indicator can do this for you.
Using the Trend Center Line
The main trend line will help you place your trade entries to lower the risk and maximize the directional move of the trend.
The confluence lines will tell you where the price is likely to pull or push away from the central line of the trend.
The simplest approach to trade a trend is to buy or sell in the direction of the trend as the price reverts back to the central line. For example, in Figure 1 we sell the peaks as the price starts to move back down towards the support of the trend’s center line.
After the wedge pattern completes there’s a strong bearish move as the price reverts back towards the center line of the trend. Here the “long traders” are being taken out as the upward breakout fails to carry through.
You can also see two more peaks that form afterwards. The signal isn’t as clear here but they can still be traded as the price start to move back towards the trend’s mid axis.
A more hands-off approach that some automated trend followers do is simply to enter and exit the market only when the price is on the main trend line. In a bear trend for instance, you sell only when the price is exactly on the trend line. This means you’re trading the “averaged trend” rather than the noise around the trend.
The video above shows an example resistance-support trading system.