Strategy Smarts Part 4: 3-Step Confluent Zones

29. Nov. 2023

Welcome to the conclusive part of our Strategy Smarts series, a set of practical trading templates expanding on concepts from our previous Day Traders Toolbox and Power Patterns series.

In this final instalment, we introduce the concept of 3-Step Confluent Zones designed to add some precision, discipline, and consistency into your trade entries.

I. Confluence: The Power and Balance

Confluence in trading aligns multiple factors to signal market moves, acting as a quality filter for trade entries. While it reduces overtrading and prevents reliance on a single indicator, excessive confluence might limit entry signals, hindering learning and skill refinement.

Achieving a balance between confluence and signal quantity is crucial. The goal is to create a nuanced approach, harnessing the power of confluence without missing valuable opportunities.

II. 3-Step Confluence Zones Explained

A 3-step confluence zone demands three components for an entry signal: a price pattern, a key market level, and a supporting technical indicator.

1. Level

Identify crucial market levels like support, resistance, or Fibonacci retracement levels, pivotal for defining entry points and risk management across various trade types.

2. Indicator

Utilise indicators that complement your chart pattern:
· Reversal Patterns: RSI, Keltner Channels, VWAP Bands
· Breakout Patterns: Volume, MACD
· Trend Continuation Patterns: Moving Averages, Anchored VWAP, Volume

3. Pattern

The price pattern acts as the catalyst for trade entry. It could be a single candle or multiple candles forming recognised patterns, backed by confluence at the chosen indicator and responding to a market level.

Select one from each group to meet the 3-step confluent zone criteria

Past performance is not a reliable indicator of future results

III. Real-World Examples

The 3-step confluence zone technique can be used when trading any market on any timeframe, we’re simply combining the confluence of a price pattern with a level in the market and an indicator.

Let’s take a look at some real-world examples:

Example 1: EUR/USD Hourly Candle Chart

In this example, a fakeout reversal pattern occurs at a clear level of horizontal support. Bullish divergence on the RSI indicator provides the additional confirmation which meets our 3-step confluent zone criteria for entry.


Past performance is not a reliable indicator of future results

Example 2: Tesla (TSLA) 1min Candle Chart

This is a day trade example in which a fakeout occurs at the previous day’s low (PDL) and price is outside of the lower VWAP band – meeting our 3-step confluent zone entry criteria.


Past performance is not a reliable indicator of future results

Example 3: Gold (spot price) Daily Candle Chart

Here’s a recent swing trading example in the gold market displaying a decisive descending channel breakout at a significant support level coinciding with VWAP anchored to previous lows.


Past performance is not a reliable indicator of future results

Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance.
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