You want to have additional “supporting evidence” to give you the signal, to enter the trade. Think of it as having a great supporting cast for a great movie, like the Godfather. The supporting casts helps make the movie what it is in addition to the main actors.So back to our example, this “supporting evidence” like a “supporting cast” you want to look for on a chart is known as, Confluence.
Confluence is when two or more factors give the same trading signal. E.g. The market is in an uptrend, and price retraces to an area of support and the RSI is pointing higher.
Going back to one of the many stocks we’ve posted in the Swing Trade section, we’re going to take a look at the success of the stock INSY. We’ll use this as an example to show confluence across 3 different time frames. The 3 different time frames are Daily chart, the 4hr chart, and the 1 hr chart. We point out 2 – 4 signals on each time frame that would meet the confluence guidelines
we’ve listed to follow below:
Here are two guidelines for you:
1. Not more than four confluence factors
– The more confluence you have, the higher the probability of your trade working out. But…
– In the real world, your trading strategy should have anywhere between 2 – 4 confluence factors.
2. Do not have more than one confluence factor in the same category
– If you’re going to use indicators (oscillators) to identify overbought/oversold areas, then use that only.
– Don’t add Stochastic, RSI and CCI because it’ll leave you with analysis paralysis.
Remember stay Seeking Value, Investors!
