Steemit Crypto Academy Season 5 Week 6 [Beginner's Course] - Confluence Trading.
Hello Steemians, it is great to be back here again in the 6th week of season 5 in the Steemit Crypto Academy. I trust everyone is doing great as I'm pleased to introduce another lesson today which is Confluence Trading.
In the previous lessons, we have discussed so many trading techniques and patterns to capitalize on the crypto market. Also, we have emphasized not relying on these techniques alone to make trading decisions as they are not even up 80% reliable. Proper confirmations and the use of multiple tools are necessary to confirm any signal before opening a position in the market.
The use of multiple tools for signal confirmation does not only increases the efficiency of your trades but also helps to avoid false signals with minimal trading losses.
The process of combining multiple tools for signal confirmation is known as Confluence Trading. Most of you must have heard about this term in our previous lesson but we will go deeper on the concept of Confluence trading.
Understanding Confluence Trading
As a crypto trader/analyst, it is not advisable to rely on a single strategy for trading decisions. The crypto market is highly volatile and investing in cryptocurrency is risky. One needs every form of confirmations to make a good investment. By confluence trading, a combination of multiple trading strategies is put together to make a trading decision.
Now let's see a scenario where confluence trading is essential.
From the chart above, we can see how the RSI is signaling a bullish trend reversal. Notice that the RSI is in the overbought region which indicates a bullish trend reversal. Also, looking at price action, we see price create a higher high. The RSI could have led to a false signal if it was relied on for a trading decision.
Now, let's add another trading tool to confirm the bullish trend reversal from the RSI. This time, we will be using the Exponential moving average.
Applying the exponential moving, we will notice that the bullish trend reversal signal from the RSI is not valid on the EMA. We can see price trading above the EMA which shows that the market is still bullish. A break below the EMA will serve as a confirmation of the bullish reversal signal from RSI.
From the explanations above, we can see confluence trading can help us to make good trading decisions and avoid fakeouts in the market.
Importance of Confluence Trading in the crypto market
From the XRP/USDT chart above, we can notice different tools were utilized to confirm the trend reversal from bullish to a bearish trend. Firstly, the price was in an uptrend until it failed to create a new high. This is an indication of a trend reversal as discussed in the previous lesson.
Another strategy to confirm this bullish trend reversal can be seen in the RSI indicator. The RSI can be seen above level 80 which is an overbought region for trend reversal. The RSI confirms that price is overbought and a reversal of about to occur. Furthermore, looking at the 21 period EMA, we can also see how price broke below the moving average line which signals a shift from bullish to a bearish trend.
From the explanations above, we can see how multiple trading strategies were utilized to confirm a trend reversal. One of these trading strategies might be wrong or sometimes give mixed signals with other strategies. But when you have multiple strategies in line with a trading signal just like we have seen above, it gives you greater confidence and an edge over your trading decisions in the market.
Let's look at the importance of confluence trading.
Importance of Confluence Trading
- Confluence trading helps traders to identify good trading setups using multiple trading techniques.
- It gives a trader an edge and confidence in his trading decision.
- Confluence trading helps to filter false signals and fakeouts in the market. False breakouts, reversals, and continuation signals can be filtered out and confirmed using confluence trading.
- Confluence trading helps in maintaining good risk management with minimal losses. With confluence trading, the success of your trading analysis is enhanced.
The majority of technical analysts deploy confluence in their trading analysis for a good trading journey. Trading styles differ and a trader needs to select the best trading strategies that suit his trading style. The high the number of confluence, the more effective a trading setup. I would recommend two or three confluence of a trading setup before making any investment decision.
Multiple level Confirmation Confluence Trading
In the previous section, we explained the relationship between the effectiveness of your trade setups and the number of confluence backing it up. Most traders do not like using multiple strategies or tools to have a clean chart. While some prefer to have all the available confirmation tools needed to make a good trading decision.
I recommend using 2 or 3 level confirmation confluence trading before making any good decision. Like I have explained, the more confluence you have increases the effectiveness of your trade setups.
2-level Confirmation Confluence trading
2-level confirmation confluence trading entails using at least two strategies or trading tools to confirm a trade setup. This can be with any trading tool depending on your trading style and what works best for you.
From the chart of Steem/USD above, we have a 2-level confirmation confluence trading for a bearish setup. Here, the combination of RSI indicator and Exponential moving average was used to confirm a bearish setup.
From the RSI indicator, price was in an overbought region above the 70 threshold. This signals a reversal in the current trend. As a trader, it is not advisable to rely only on the RSI to confirm the trend reversal. Confirming this trend reversal using another trading tool will help filter out fakeouts and false signals from the RSI. Now, we deploy the EMA to confirm this trend reversal.
We can observe that price was still trading above the EMA after the RSI signal. This means that the trend reversal might be a fakeout as price can remain in an overbought region in a strong trending market. To confirm the trend reversal signal from the RSI, we need to see price break below the EMA line. Then we can have good confirmation of the reversal signal to make a trading decision.
3-level Confirmation Confluence Trading
Just like we have discussed in the previous section, the 3-level confirmation entails using a confluence from at least 3 trading tools to confirm a trade setup. We will be using the previous chart of XRP/USDT to explain 3-level confirmation confluence trading. The 3-level confirmation gives higher accuracy and edge over a trade setup.
Looking at the chart above, we have at least 3 confluence to back up a sell signal. We have the RSI, a break of market structure, and also a break below the Exponential moving average. All these strategies are signaling a bearish reversal and this is a strong confirmation to open a sell position on XRP/USDT.
In this lesson, we have explained confluence trading as an important concept in cryptocurrency trading. As a trader, proper confirmation is required to make any trading decision. As we have explained in the lesson, the higher the number of confluence for a trade setup, the higher the chances of the market going in your favor.
Note: Trading cryptocurrency is risky due to the highly volatile nature of the market. Always ensure you carry out your analysis effectively with good risk management. This lesson is not a piece of financial advice but was prepared for educational purposes to enhance your knowledge in the crypto market
Thank you for being part of this 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?
Note: Please ensure you use your own crypto chart for this exercise. This is a crypto academy and every study should be related to the crypto market.
- Homework must be posted in the Steemit Crypto Academy community. Your homework title format should be " [Your Title] - Crypto Academy / S5W6- Homework Post for @reminiscence01".
- Plagiarism is a great offense in Steemit Crypto Academy and it won’t be tolerated. Ensure you refrain from any form of plagiarism.
- Your post should not contain less than 400 words.
- All images, graphs, and screenshots from external sources should be fully referenced, and ensure to use watermark with your username on your screenshots.
- Use the tag #reminiscence01-s5week6, #cryptoacademy, #club5050 if eligible and your country tag among the first five tags. Also include other relevant tags like #confluence, #trading #cryptocurrency.
- Only users who meet the requirements for #club5050 are eligible to participate in this homework task.
- Homework task run from Sunday 00:00 December 19th to Saturday 11:59 pm December 25th UTC Time.
- Only users with a minimum of 300 SP and having minimum reputation of 55 are eligible to perform this homework. Also, note that you must not be powering down.
- Users who have used upvote tools to gain SP or build their reputation are not eligible for this homework.
- To be eligible for #club5050, a user must have powered up 150 Steem in the last month.
Note: You can only drop your homework link in the comment section if not reviewed after 48 hours.
The comment section is freely opened for suggestions and feedback on the lesson and homework.