Confluence
Community Submission - Author: Caner Taçoğlu
Originally, the term confluence is used to describe a geographic point where two or more rivers come together to form a single body of water. But following the same logic, it may also be used in the context of finance, to describe the confluence of multiple investment strategies or trading signals.
When it comes to long-term investment, confluence can be achieved when an investor, advisor, or portfolio manager creates a portfolio based on various strategies, typically investing in multiple asset classes. In most cases, this would lead to what we call portfolio
diversification. Note that confluence relates to the combined use of different strategies, while diversification essentially refers to a portfolio that has distinct types of assets.
In regards to trading and
technical analysis (TA), confluence could be described as the development of a trading plan or strategy that takes into account different trading methods or TA indicators. In addition, the term may also be used to describe the combined use of multiple trading signals, as a way to confirm the validity of a potential buy or sell signal.
For instance, imagine that a trader spotted a potential reversal price zone based on
resistance and
support levels. But before taking the trade (i.e., opening a position), the trader could also check the position of
moving averages to see if any of them suggests the same reversal zone. Other than that, they could also use the
Ichimoku Cloud method to try and confirm even more the validity of their analysis.
So we may say that a market trend or price reversal level may be confirmed through the use of multiple sources of data and trading signals. This is what we call a technical analysis confluence. As a consequence, a trader would have more reasons to either open or close a position or to simply wait for a better moment to take action.