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AUDCAD Setup: The Art Of Trading With Confluence

Confluence is an important concept in trading and it means that a trader looks for different clues on his price chart and then lets price tell him a story. Trading with confluence is key and combining different signals to form a sophisticated trading idea is important and also helps build confidence in one’s setup.

At the same time, being consistent with your trading entries and confluence factors is important to achieve consistent results as a trader and then build even more confidence. Over the past few days, I kept following the AUD/CAD setup forming and I already pointed it out during my Sunday analysis. I want to take a few moments now to show you how the different signals can be combined to form a good price story and then trade with confluence.

The right chart is the daily chart and you can see 3 signals happening at the same time. After a long uptrend, price completed the 161 Fibonacci extension move – after such an extended move, a reversal is likely to happen. At the same time, you can see the big black horizontal line which is a previous swing high and a major resistance area on the daily chart.  Finally, price spiked above the resistance and into the 161 Fibonacci level, leaving a wick to the upside that got rejected very hard. Even more interesting, the wick happened after a strong bearish candle which shows a desperate attempt to push price higher which was rejected and confirmed that bulls weren’t in power.

 

AUDCAD

On the left 4H chart we get other clues and here we can look at micro price and trend structure. First, I marked the 3 pushes into resistance which barely broke the previous highs. At the same time, volatility had increased. Then, the major (news driven) spike happened that we saw on the daily. Afterward, price started to sell off very strongly and even established a new trend structure. You can see how price started making lower highs and lower lows. Also, the 20 SMA held during the sell-off and acted as resistance which is another good sign. The initial entry was less confluence would have been after the massive rejection candle on the Daily. The safer and more conservative entry would have been after the close below the daily 20 SMA.

For now, price found support at the red area which we identified previously. So far, we are not seeing any strong bullish moves at the support area which could mean that bears are still in control. A break of that level could open up the room for even more shorting opportunity. Or, a successful retest of the 20 SMA on the daily could add even more confluence to this setup.

As you can see, by looking at the top-down analysis and combining different clues, we were able to understand what price was telling us and how the powers between bulls and bears slowly shifted. The quality of this trade was/is very high because we were able to find multiple confluence factors and combined them into one sophisticated trade idea. Approaching your trades from such a perspective allows you to grade your trades based on the amount of confluence factors that you have and then keep track of your overall trading and the quality of your trades.

Over time, you will gain a deep understanding about market moves and your system by following price in such a detailed way. You will be able to pick up nuances that most traders overlook and you will be able to tell which confluence factors are the most important and which are not as meaningful. In my opinion, this is the true power of understanding price charts, being able to read bullish and bearish power and then time trades with confluence. It sets you apart from most other amateur traders who just hunt for signals and flip through timeframes without really knowing what to look for.

If you want to read more about the power of confluence, here is a new article I wrote on our partner site:

Why grading trades is so important and how to do it

 

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Risk disclaimer: The information presented on Tradeciety are for educational and entertainment purposes only. Nothing on this website serves as investment advice or recommendations. Trading is risky and you can lose more than your initial investment. Tradeciety cannot be held responsible for any decisions visitors make. Please consult a financial advisor before making any investment decisions. Risk disclaimer.

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One comment

  1. Superb article! It really explains in detail what we should look for on the charts. Thanks Rolf!

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