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The Importance of Indicator Confluence in Effective Trading

Trading in financial markets can often feel like navigating through uncharted territory. Just as an explorer relies on a compass for direction, traders need a set of reliable tools to guide them. These tools, in the trading context, are known as 'indicators'. But more important than just having indicators is having 'indicator confluence' – multiple, corroborating signals that reinforce a decision to enter or exit a trade.


The selection of indicators is a personal choice. It varies from trader to trader based on their trading style, risk tolerance, and market understanding. You may choose to use open-source indicators, proprietary ones, or a combination of both. The key is to choose indicators that you understand well and find useful in interpreting market trends and patterns.


However, relying on a single indicator can be risky. The financial markets are complex and influenced by numerous factors. No single indicator can accurately capture all these elements. This is where the concept of 'indicator confluence' comes into play.


'Indicator confluence' means using multiple indicators that align to provide a strong signal. For example, you may use a moving average indicator to identify the trend direction, a stochastic oscillator to determine if the market is overbought or oversold, and a volume indicator to measure market participation. When all these indicators align, they provide a stronger signal than any single indicator could.


Using indicator confluence in your trading strategy increases the probability of making successful trades. It helps filter out 'false signals' and improves the overall accuracy of your strategy.


Yet, remember that using multiple indicators does not guarantee success. It merely provides additional insight into market behavior. The final decision to enter or exit a trade should always be based on careful analysis and sound judgement.


Furthermore, once you establish a trading strategy that incorporates indicator confluence, it's crucial to stay consistent. Stick to your chosen indicators and strategy, no matter what. Trading is not just about making profitable trades; it's about consistency and discipline. A trader without a strategy is like an explorer without a compass; they will likely lose their way.


Here's an example of a confluence system, using a combination of:


1) Custom Range Creator: It can auto-generate a range based on a number of past candles or manually defined high and low prices. The range provides a comprehensive overview of market trends, and its elements include Range High, Range Low, Range Mid-Point, and First and Third Quartiles. After we defined a range we can add normalized OBV on the price chart, so we can observe it along price action. This step helps spot divergences, especially if they are occurring in critical parts of the range.



In the example provided above, we start by establishing a range on a 1-day ETH/USDT chart on Bybit. The range is determined based on the lowest and highest points of the past 100 candles. With our range set, we then employ the OBV (illustrated by the violet line) to pinpoint significant market patterns. One striking observation is a significant bearish divergence within the range. Further enhancing our understanding, we also spot a price rejection at the third quartile of the range (Q3). Therefore, the appearance of both a marked divergence and a Q3 price rejection serves as our first point of strategic confluence. Now, let's delve deeper to identify additional factors that align with these initial observations.


2) Easy Trade Indicator: This tool is our crowning achievement. It provides high-probability buy and sell signals across all asset classes and timeframes.



In the example above, we drill down to a lower timeframe - the 4-hour chart - which is where we scrutinize our potential entry points. Here, we notice that Easy Trade has flagged a bearish reversal candle (marked orange), followed by another candle that closes below and also exhibits negative volume. This provides another supporting element for our confluence-based strategy.


3) Liquidity Raids and Sweeps: Liquidity is crucial in trading as it indicates the potential direction of price movement once buy/sell orders have been executed. Our liquidity tracking tool identifies 'raids' or 'sweeps' of liquidity, signaling possible price reversals



In the example above, we see two key occurrences: the previous high has been exceeded, and the buy-side liquidity has been 'swept', as indicated by the green horizontal line. This suggests a surge in buying activity, often a sign of an impending price reversal. These events add yet another layer of evidence to our trading decision, further strengthening our strategy through confluence.


Conclusions:


With these three points of confluence aligned. The bearish divergence between OBV and price plus the rejection at Q3 range, the bearish reversal signal from Easy Trade and the sweep of buy-side liquidity. We are now in a strong position to initiate a short trade. Our stop loss should be strategically placed above the high, ideally 2-3% above the peak of the bearish reversal candle (the orange candle). This method allows us to limit potential losses while leveraging the multiple confirmations of our strategy to potentially earn a profit. Remember, maintaining a disciplined approach and strict risk management is key to trading success.


The results? Pretty satisfying :)



Shifting to a 6-hour chart to mitigate market noise, we found our exit signal at the next bullish reversal candle (highlighted by the blue candle). This approach resulted in a solid 8.26% profit. With the application of leverage, the profits could have been significantly amplified.


We hope you found this content informative and helpful for your trading journey. To keep up with our latest insights, don't forget to follow us across all social media platforms.


If you wish to take a deeper dive into trading strategies or need specific guidance, you can book a consultation with one of our experts at our coaching page.


Interested in using these indicators for your trades? Visit our premium indicators page to learn more.


Thank you for your time, and here's to your trading success!


Trading Paradise Team

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