CONFLUENCE TRADING | CRYPTO ACADEMY / S5W6 | HOMEWORK POST FOR @reminiscence01.
Hello steemians, I hope you all are doing well today. This Is one of the best lectures I have been opportuned to participate in and I have carefully read and perfectly understood the lecture by Professor @reminiscence01 which is based on “Confluence Trading ”.
The lesson has given a detailed explanation of the above topic and below are my answers to the questions asked in the homework task from the lesson.
- Explain Confluence trading. Explain how a trade setup can be enhanced using confluence trading.
- Explain the importance of confluence trading in the crypto market?
- Explain 2-level and 3-level confirmation confluence trading using any crypto chart.
- Analyze and Open a demo trade on two crypto asset pairs using confluence trading. The following are expected in this question.
a) Identify the trend.
b) Explain the strategies / trading tools for your confluence.
c) What are the different signals observed on the chart?
EXPLAIN CONFLUENCE TRADING. EXPLAIN HOW A TRADE SETUP CAN BE ENHANCED USING CONFLUENCE TRADING.
CONFLUENCE TRADING:
Confluence Trading was gotten from the original term of confluence which means the geographical assembly of various bodies of water from different sources, coming together to form a single channel. This ideology gave birth to the term “Confluence Trading” in the crypto market today.
Confluence Trading is known to be a method in trading that involves the combination of several other trading technical analysis in other to get an adequate result that ascertains or predicts the direction of a crypto market. So we say there’s a confluence when multiple trading analysis provides the same trade signal.
For example, imagine I spotted a potential bullish formation setting based on the higher lows and higher high formation of a price action but before opening a trade position, I could also verify through a Relative Strength Indicator (RSI) to see if it points to a further uptrend movement or otherwise. Another alternative can be the Moving Average Exponential (EMA) to confirm the price movement prediction. Below is a list of possible indicators that can be applied in a trade setup.
- Relative Strength Indicator (RSI)
- Moving Average Exponential (EMA)
- Moving Average Convergence Divergence (MACD)
- On Balance Volume (OBV) etc.
The crypto market being a very volatile market requires a good percentage of certainty before entering or closing a trade, this is why multiple trading analysis is applied to increase the chances of having successfully outcome in trading and to minimize any form of losses that may be incurred. Good and experienced traders makes use of the confluence trading to suggest a better trade analysis.
From the chat above we can see how the Relative Strength Indicator is signaling a bullish trend reversal but looking at the price chart above we can see the market making a higher high and higher low formation. This simply means that if the Relative strength indicator was used to make a trading decision, there would have been a negative outcome due to the wrong indication by the RSI as seen on the price chart movement.
HOW A TRADE SETUP CAN BE ENHANCED USING CONFLUENCE TRADING:
Like earlier explained above, Confluence Trading is a combination of multiple trading analysis in a trade. This method can be used in a trade setup to enhance the possible outcome of a trade. The fact that a single indicator if relied upon for making trading decision could be wrong, brought about the method of the confluence trading system. below is an example of an application of confluence trading system to a chart.
We can notice from the chart above, how the price action was creating a higher formation and a higher low formation as the market proceeded to the highest point. So we can also see how the Relative Strength Indicator (RSI) was signaling a bearish movement while on the other hand, we can see the Moving Average Exponential (EMA) signaling an upward trend which is in contrast to the RSI.
Therefore this tells us that the Moving average Exponential (EMA) indicator would have been right if the trading decision was made with it, while the Relative Strength Indicator (RSI) would have been wrong. Thereby, this is the reason why a confluence trading can be used to enhance the outcome and of a trade setup.
EXPLAIN THE IMPORTANCE OF CONFLUENCE TRADING IN THE CRYPTO MARKET?.
The importance of Confluence Trading in the crypto-sphere cannot be overemphasized as it plays a vital role in trading decisions. It enables us to confirm a market trend through the use of multiple trading analysis that is available at our disposal. No trader wants to incur loses when trading and that is why the implementation of this strategy is vital for traders. Below are a list of the importance of Confluence Trading.
From the ETH/USDT chart above we can see the different tool/indicators used to ascertain the bullish trend reversal from an upward trend to a downward trend. Notice that price chart was in an uptrend until the buyers were unable to push the price higher than its previous high, so that alone is regarded as a bearish signal.
A different analysis could also have been used to predict the movement of the market which is the Moving Average Exponential (EMA) indicator, this indicator as shown above depicts the direction of the price movement as price broke below the moving average line which is an indication of a possible breakout from the bullish market to a bearish trend.
He above explanation is to confirm the fact that multiple trading tools or analysis can be put in place to confirm the subsequent trend of a market which keeps most traders awake. Sometimes an indicator or trading tool can give a false signal or can give a contradicting signal to patterns, so in order to get a more reliable analysis, multiple trading tools is put in place. Below are the importance of Confluence Trading.
| S/N | IMPORTANCE OF CONFLUENCE TRADING |
|---|---|
| 1. | Confluence trading allows traders to get a better trade analysis while setting up a trade. |
| 2. | The confluence trading serves as a filter by revealing various confirmation signals from multiple analysis. |
| 3. | False signals and wrong indicators can be earlier spotted and avoided using the confluence trading system. |
| 4. | Confluence traders makes use confluence trading systems to maximize their profit margins and minimize losses in every trade setup. |
| 5. | Confluence trading improves the ability of the trader in making certain decisions about trading which may effect the trading analysis. |
| 6. | When a trade is setup using a confluence Trading system, the trader has a better expectation of the outcome. |
In general, the confluence trading system is used to avoid the over reliance or dependency on specific patterns of trading which may sometimes fail due to the wrong signal it poses. Like earlier discussed above, no one wants to inquire a loss in a trade thereby the need of the application of the confluence trading is of high importance in trading analysis today.
EXPLAIN 2-LEVEL and 3-LEVEL CONFIRMATION CONFLUENCE TRADING USING ANY CRYPTO CHART.
2-LEVEL CONFIRMATION CONFLUENCE TRADING:
Confluence trading As explained above is a combination of multiple tools or analysis to get an get an efficient price action speculation in trading. Multiple tools are used to avoid the over-dependency on a single strategy which might be false at some moments. This brings about the 2-level confirmation confluence trading.
The 2-level confirmation confluence trading talks about the use of at least two trading analysis or tools to speculate more accurately the direction of a market trend or simply to confirm a trade setup. An example of a 2-level confirmation confluence trading chart is shown below.
The ETH/USDT chart above is a typical example of 2-level confirmation confluence trading for a bearish trade setup. This shows us how we can combine two trading tools for the confirmation of a trade setup. Here, the relative strength indicator(RSI) and the Moving Average Exponential (EMA) was used in the setup.
Analyzing from the Relative Strength Indicator sector, we can observe from the image above that the RSI indicator was in an overbought region above the 70 threshold which is a strong reversal signal but that alone cannot determine the certainty of the speculation, there an skilled trader will confirm the signal by using a different trading tool. Using a tool like the Moving average Exponential(EMA) can help confirm the trend reversal and fitler false signals which might have been given by the RSI indicator.
The fact that the price was still trading above the EMA for a while even after the RSI signal, might as well mean that the reversal signal might be a fake breakout due to the fact that the price can possibly maintain its progression making higher highs and higher lows if it were to be a strong trending market and this is why the Moving average Exponential(EMA) is essential to complete the trade setup. So from the chart above the break of the EMA is the needed confirmation required to take a tradeing decision.
3-LEVEL CONFIRMATION CONFLUENCE TRADING:
A good trader understands the essence of the application of multiple trading analysis in a trade setup. It is said that the more the more the number of confluence applied in a trade setup, the higher the chances become in getting the right speculation required to open a trade position. This analysis brings us to the 3-level confirmation confluence trading.
The 3-level confirmation confluence trading is simply about the use of at least three trading analysis or tools to speculate more accurately the direction of a market trend or simply to confirm a trade setup before taking a trading decision. An example of a 3-level confirmation confluence trading chart is shown below.
The ETH/USDT chart above is also used as an example of a 3-level confirmation confluence trading for a bearish trade setup. This shows us how we can combine three trading tools for the confirmation of a trade setup. Here, the relative strength indicator(RSI), the Moving Average Exponential (EMA) and a market structure breakout was used in the setup as shown above.
The market structure breakout was another trading analysis that was applied on the price chart above to confirm a breakout from the bullish trend to a bearish trend. This increases the certainty for a trader to effectively make a right trading decision. Trades tends to turnout more successful when multiple tools or trading analysis are applied in a trade setup.
ANALYZE AND OPEN A DEMO TRADE ON TWO CRYPTO ASSET PAIRS USING CONFLUENCE TRADING. THE FOLLOWING ARE EXPECTED IN THIS QUESTION. (A) IDENTIFY THE TREND. (B) EXPLAIN THE STRATEGIES / TRADING TOOLS FOR YOUR CONFLUENCE. (C) WHAT ARE THE DIFFERENT SIGNALS OBSERVED ON THE CHART?
From the ETH/USDT chart above we can notice that the price action was in bearish trend, so i decided to take my entry after applying two major trading analysis to confirm the trend reversal. I made use of the EMA indicator and the RSI indicator to confirm my trade setup and from my result which is shown below, my trade setup using a 2-level Confirmation Confluence Trading was correct as both the EMA and the RSI indicator revealed a bearish reversal signal.
The above image shows my entry in the demo trade. I bought at the price of 3,816.33 then I put my sell at 3,830.00 so i watched the trade as it moved in the direction of my trade setup until it got to the sell position and even continued above it. Below is the proof of the my placed order to buy and sell at the stipulated amount as shown in the image.
The chart below is a confirmation of the progression of my trade setup as it exceeds the sell order i placed which shows that the trade setup using the 2-level Confirmation Confluence Trading was correct. from the below chart we can see the formation of a higher high and a higher low formation which is an indication of a strong bearish reversal.
Finally, the below image shows the breakdown of the sell order i placed at the begining of the trade and also shows the sell order execution as the price action moves towards the setup amount for a sell. this shows the success of the demo trade setup using 2-level Confirmation Confluence Trading
| S/N | CONFLUENCE TRADING SETUP |
|---|---|
| A. | The initial market trend was bearish, as more lower highs and lower lows were formed on the downtrend. |
| B. | Using the Moving Average Exponential (EMA) and Relative Strength Indicator (RSI) I was able to depict the the direction of the price before creating an entry point for the demo trade. I could see a break in the bearish trend which later resulted to a move in the bullish trend. |
| C. | The I observed a bearish reversal signal which was confirmed by the EMA indicator as speculated by the RSI indicator. |
Confluence Trading is indeed a spectacular aspect in trading that every good trader must know how to apply. The fact that one can apply multiple trading analysis or tools to confirm a trade speculation is actually a simpler and surer way to setup a trade. I have really been impacted a lot by this wonderful lecture carefully and orderly thought by professor @reminiscence01. It is always a pleasure to learn from our lessons sir.
Thanks for reading.
All screenshot were taken from TradingView and were edited on corel draw by me