Confluence in technical analysis refers to the occurrence of multiple indicators or signals aligning to suggest a certain price action. In other words, it is the convergence of multiple technical indicators or patterns at a specific price level, providing stronger evidence for a potential trade or investment.
For example, if a stock is showing a head and shoulders pattern on the daily chart, and the 50-day moving average is also crossing below the 200-day moving average at the same price level, this would be considered a confluence of indicators. This convergence of signals would provide a stronger indication of a potential downtrend and a possible entry point for a short position.
Confluence in technical analysis can also refer to the alignment of multiple time frames. For example, if a stock is showing a bullish trend on the daily chart and the weekly chart, this would provide a stronger indication of a potential uptrend and a possible entry point for a long position.
Confluence can also be used to identify potential areas of support and resistance. For example, if a stock’s previous high and a key Fibonacci level are at the same price level, this could indicate a potential area of resistance. On the other hand, if a stock’s previous low and a trend line support are at the same price level, this could indicate a potential area of support.
In conclusion, confluence in technical analysis refers to the alignment of multiple indicators or signals at a specific price level, providing stronger evidence for a potential trade or investment. By identifying confluence, technical analysts can make more informed decisions and increase the probability of successful trades.