Hello everyone, today I welcome you again to another time in Crypto Academy. I tell you it has been a wonderful week thus far. I am here once again this week to complete my homework task on the lecture given by our professor @reminiscence01 titled - Confluence Trading. you can as well join me to read using the lecture page.
Below are the answers to my homework post, I wish you a happy reading.
Question [1] - Explain Confluence trading. Explain how a trade setup can be enhanced using confluence trading?
Confluence trading is a combination of many trading plans that are put together in other to make a trading decision. by combining multiple trading techniques there are chances of increasing your chance of gaining a trade, when the proper strategies are put together then it increases your odds of winning a trade. with the judicious use of different trading indicators that provides the same analysis/reading as a way to affirm the validity of a potential signal either buy or sell.
It is also regarded to technical analysis known as (TA) as well as to trading, it can also be seen as the creation or progress of a trading strategy that accommodates multiple trading methods or TA indicators known as the technical analysis confluence.
Although these strategies/indicators tend to produce a false result when making use of different tools instead of making use of just one, as such the final result is more valid. we all know in confluence trading, different methods are used to make trading decisions, also the indicator is responsible to checkmate the validity of the tools by making use of other tools, and also it is capable of analyzing the market in an outstanding way which entails the false signals being filtered out.
Combination of the RSI, Parabolic SAR, Willian %R and some other indicators are better to use in determining and making a decision in confluence trading
All these are widely done in the Crypto Market which we all know is highly versatile, here the price of coins ain't stable, and as such, the price keeps changing at different intervals. trading as well performed by the traders and the purchasing and selling pressure affect the movement of the market. and also the market act in line with the moves of the traders hence the traders analyze the market before a trading decision is taken and also the analysis of the market is done by the traders using multiple tools to determine/predict the future outcome of such market in question.
Question [2] - Explain how a trade setup can be enhanced using confluence trading?
The trade setup is seen as the major condition that deserves to be available for a trade to be considered, as a trade-following trader, hence a trend needs to be present. although your trade setup may be a different one but ensure that the various conditions are conducive and one which favors the traded strategy.
We all know that confluence trading is often used in analyzing the market hence traders are not advised or it is not advisable to place one's focus on just a single method or tool as the case may be to analyze the market like I said earlier tendencies are resulting to producing a false result at times leading to loss of money, but that can be avoided when the confluence trading strategy is adopted and used, by making use of various tools to analyze the market which produces better and more valid results.
Furthermore, I will be explaining more using the below image, as you all can see, I made use of RIS Indicator and this a technical indicator helps to analyze the financial markets. this indicator shows the chart of the new and historical weakness or strength of a particular item or market based on the closing prices of a recent trading period. so as simple as it is to comprehend it tells us about a market, whether the market is in an overbought district or an oversold district. it also gives the future predictions of a particular coin. if you are looking for a better indicator to provide the best trade entry and existing signals as well as limit losses then this indicator is the one for the job.
We can not always be so sure about an indicator hence losses are also incurred but so to be on a safer side we should make use of multiple indicators alongside this indicator. below is an image showing the combination of both the RSI and the Parabolic SAR indicator, the Parabolic SAR Indicator produces dots that move alongside the price, so when there is an all high in price the movement of the dot rises from down to the top and vice versa and when there is a break out the dots moves in opposite directions.
So as seen in the above image, the price was moving downward because of the high selling force due to the market was at the oversold territory and there occurs a confirmed downtrend n the market and as such it is advisable to quit and exit the market as soon as possible to avoid loss as shown by the dots in the image.
the combination of the RSI and the Parabolic SAR indicators, as seen in the chart the usefulness of the Parabolic SAR it clearly showed the dot movement alongside the price. like I said when the price is all-high, the dots rise from down to the top and when it drops it moves from the top to down, and when there is a breakout, the dots moves in the opposite direction.
The Confluence trading is achieved with the use of the RSI, Bollinger bands, and the Parabolic SAR Indicators. making use of the **Bollinger band is crucial, as important and popular as it is, it can point out both the bearish and bullish trend. three [3] lines are always provided and each has its function. when the price of a value is within the center and the upper line it indicates an all-high price, it shows the high purchasing pressure and low selling force which provide the best signal to enter the market.
So as seen in the above image, the RSI brings out the signal which shows that the market is in oversold territory. the Parabolic SAR produced the dots which shows the downward movement, and the Bollinger bands showing the price was moving in the direction within the middle and the downward band as such indicating a downtrend.
The existing signal is produced by the various indicators, which is advisable to exit the market as proven vividly. although the RSI showed us the market was in oversold territory, the buying pressure was low, yet the price was moving within the middle line and upper line which indicates that the price was rising at an all-high level as indicated by the Bollinger bands. so as seen in the above images, multiple indicators are been used to avoid false results produced when using just an indicator, with this helps to make accurate decisions in trading.
Also when the price is within the center and the down line, it points out a bearish trend, which indicates a fall in the market and the selling force is all-high. hence as a result of this, the coin falls downward which indicates an existing signal from the market.
Question [2] - Explain the importance of confluence trading in the crypto market?
The importance of Confluence Trading is as follows.
1- Confluence trading enables traders to know good trading setups with the use of different trading methods.
2- Confluence trading enables to fish out false signals and also false breakouts, reversals, as well as continuation signals, are removed and affirmed when using confluence trading.
3- Confluence trading gives a trader a step ahead and believes in his decision-making while trading.
4- It also helps in keeping and sustaining better risk management with little losses incurred. Confluence trading helps to better decisions and provides well-analyzed trading.
5- Confluence trading helps traders to identify a better entry and exit point using the best trading setup.
6- It is so crucial and very useful, it enables traders to see the accurate entry and exit signal to minimize losses.
Now let's see how important this confluence trading is using the below chart.
As seen in the above chart, the RSI indicator has been used to analyze the market. the all-high price indicates an uptrend in the market, yet the RSI shows the downtrend signal, as well as the market, was in oversold territory while moving downward in a nutshell we can say that the RSI indicator produced a false signal.
So proven the fact that making use of just an indicator is not advisable and we should expect a better result hence it is not reliable.
Now let's look at the chart below to confirm the importance of using multiple indicators.
Now as seen in the chart above, we made use of the RSI, Bollinger band, and also the Parabolic SAR. showing the necessary details we need, like the downtrend movement in the market which produced a sell signal yet the price keeps getting all-high which thus proved that the RSI indicator has produced a false signal. so we can only detect and filter out the false signals with the help of multiple indicators, we can all see the importance of using the confluence trading strategies in making a well and perfect decision in trading.
Question [3] - Explain 2-level and 3-level confirmation confluence trading using any crypto chart?
Knowing that the idea of confluence trading is to combine multiple technical indicators on a trading chart, and this is done in various levels of confirmation of the confluence trading. please keep in mind that the more advanced level of the confluence the better the level of the trading affirmation. so let's quickly see what 2- level and 3- level confirmation confluence entails.
It is the strategy in which traders use in combining two trading techniques on a given chart to get better clarification of a trend. this is a crucial method which traders use to filter out bad signals from a trend during trading, and this is not so possible when using just an indicator. for a better and accurate trading outcome traders are expected to make use of an added indicator alongside the first indicator which makes it two to provide a better view to the trade either the entry or exit spot. below is an example of the 2 - level confluence.
As seen in the chart above an example of a 2 - level confluence trading is shown in the BTCUSD market, in which we all can see the strength of the market. as seen in the chart image I made use of two indicators combination, where I combined the **EMA 100 indicator alongside the RSI indicator, so with the combination of these indicators, as concrete confirmation of the spot as we have seen the market bearish setup, where the RSI indicator showed that the price was in overbought territory above the 70 threshold level. hence signals a reversal in the trend.
To me, it is not recommended for one to use just an indicator to confirm the reversal of the trend, so let us confirm the trend reversal with the use of another trading technique to filter out false results as the price remains in the overbought territory here in a very strong trending market. now we need to see the price break out beneath the EMA line to confirm the trend reversal signal from the RSI indicator for a good and accurate trading decision.
As said in the previous discussion, the 3-level confirmation involves the use of a confluence resulting in a minimum of three [3] indicators/tools in other to confirm a trade setup. the 3-level confirmation provides a higher advantage over a trade setup. I will be making use of the previous chart of BTCUSD for further illustration to explain 3-level confirmation confluence trading.
Here in the chart, there are at least three [3] confluence trading tools backing up a sell signal entry, and they are the RSI, break of market structure, and also a break beneath the EMA. generally, this is a bearish signal reversal and it is a solid confirmation to open a selling point on BTCUSD.
Question [4] - Analyze and Open a demo trade on two [2] crypto-asset pairs using confluence trading. The following are expected in this question. (i )- Identify the trend, (ii) Explain the strategies/trading tools for your confluence. (iii) What are the different signals observed on the chart?
Here we are again, on my demo account, I will be making use of the USDJPY market to work out the buy trade. so let us begin.
[i]Identify the trend.
Identifying a trend is the number one thing to do before talking about the addition of various indicators, the market mood should be known by it that the market is in bullish or bearish point.
As seen in the chart above, just with the nature of the market one could see a bullish trend, as we notice buyers have been ready in the market, so you see not even an indicator is used we can already see possibilities for a buy entry position.
[ii]Explain the strategies/trading tools for your confluence.
For this task, I will be making use of some tools combination which are the EMA indicator with the RSI and also the MD banknifty structure breakout. using these tools will help us to view a strong trend alongside a solid spot to work out the trade.
[iii]What are the different signals observed on the chart?
Viewing the above image chart of the USDJPY, we notice a different signal from the vertical point below as well as the different signals from the indicators used, we saw how the price keep moving in the EMA indicator and also the signal from the RSI indicator that has proven the different signals on the trend, that is why the confluence is so crucial in detecting the accurate signal on the trend as we arrive at the specific location.
This is a buy trade after the confluence confirmation, a made a buy trade entry in which I purchase units of BTCUSD was made.
As seen in the above chart, I made us of the 3- level confluence trading on the chart, 100 EMA, the market breakout structure as well as the RSI indicators. this made me confirm my entry spot to sell.
As you can see the trade made by me in the above image I made profit.
Confluence trading is a crucial technique in digital currency, it plays a major role and gives a better chance to win, and also helps traders to confirm their spot in trading.
with the 2- level confluence, 3-m level confluence and more give traders an edge over their trading analysis, and as such an accurate decision is taken by the traders to have a perfect entry spot or position.
Thanks to professor @reminiscence01 for this great lecture.