Confluence

What Is Confluence?

Initially, the term confluence referred to a geographic location where two or more rivers join to create a single body of water. However, using the same reasoning, it may also be used in finance to describe the convergence of multiple investment methods or trading signals. 

Confluence can be created in long-term investment when an investor, advisor, or portfolio manager develops a portfolio based on diverse methods, often investing in multiple asset classes. In most circumstances, this would result in portfolio diversity. However, it is important to note that confluence refers to the combination of diverse methods, whereas diversification generally refers to a portfolio with different assets.

Diving Deep Into the Idea of Confluence

Confluence in trading and technical analysis (TA) can be defined as the creation of a trading plan or strategy that considers various trading strategies or TA indicators. Furthermore, the word may be used to indicate the simultaneous use of numerous trading signals to check the authenticity of a possible buy or sell signal.

An Example of Confluence

Assume a trader identified a probable reversal price zone depending on resistance and support levels. However, before entering the trade (i.e., starting a position), the trader could examine the position of moving averages to determine whether any of them indicate the same reversal zone. 

Aside from that, they could employ the Ichimoku Cloud approach to confirm the correctness of their findings even further. As a result, we can argue that a market trend or price reversal level can be confirmed by utilizing several data sources and trading signals. This is referred to as a technical analysis convergence. As a result, a trader would have much more reasons to establish or terminate a position or just wait for a better opportunity to act.