The first step to efficiently identifying the confluence using moving averages is understanding the concept itself. Essentially, confluence refers to the occurrence where two or more levels come together on the same chart. Consequently, this is an invaluable tool for traders since these overlapping levels can yield strong areas of support and resistance. Meanwhile, moving averages rank among the most basic and commonly used tools in a trader’s arsenal, providing trend-following and momentum indicators. But how do you merge these two aspects to quickly determine confluence using moving averages?
To use moving averages for confluence, you will need at least two different moving averages. Generally, traders recommend using one short-term and one long-term moving average. For example, the 50-day and 200-day moving averages are quite popular. Once you’ve set your moving averages, the idea is to spot the points on the graph where these moving averages intersect, forming confluence.
However, employing various moving averages to one chart can become slightly messy. Thus, it’s critical to understand the simple way of identifying confluence, which is to monitor chart dynamics and scan for areas where the moving averages overlap or intersect.
To illustrate this, look for the junctures where these moving averages meet, whether upward, downward, or horizontally. Set these as your support and resistance levels. Now, imagine a scenario where the price approaches these levels; it’s likely that you’ll witness either a bounce-back or breakthrough, thus indicating your cue to execute long or short trades.
Another way to streamline your process of identifying confluence using moving averages is by using the Moving Average Ribbon, a succession of moving averages of different lengths plotted on the same chart. When all the moving averages in the ribbon flow in the same direction, it signifies a trend. The additional lines give you a dimensional view enabling faster confluence identification.
Similarly, the Directional Movement System, an indicator consisting of the ADX line and two DI (Directional Indicators) lines, can also prove useful in establishing confluence. When combined with moving averages, these indicators can provide exceptional insight into a potential confluence.
Increasing your charting timeframe can also make the confluence identification procedure more comfortable. Switching from the daily to the weekly or monthly timeframe can help visualize the macro environment more clearly, thus spotting confluence faster.
Aligning the confluence with pivot points, another technical analysis tool that uses prior price level to calculate future support and resistance, can also bolster confluence identification. As such, where there’s a confluence of moving averages and pivot points, a more robust level of support or resistance is likely.
Lastly, it’s essential to pair your confluence analysis with other technical indicators for confirmation. Relative Strength Index (RSI), stochastic oscillators, or candlestick patterns can serve to affirm your confluence and thereby increase the probability of a successful trade.
Remember, like all trading strategies, finding confluence with moving averages won’t always be perfect. It merely improves your odds in the market. Thus, always use proper risk management and never risk more than you’re willing to lose on a trade.
