The native meaning of the term confluence is used to describe a geographic point where two or more rivers come togETHer to form a single body of water. In the financial sense, confluence meaning in trading is the integrating of multiple investment strategies or trading signals together.
When it comes to long-term investment, confluence can be achieved when an investor, advisor, or portfolio manager creates a portfolio based on various strategies, typically investing in multiple asset classes. In most cases, this would lead to what we call portfolio diversification. It is important to note that confluence relates to the combined use of different strategies, while diversification essentially refers to a portfolio that has distinct types of assets.
In regards to trading and technical analysis (TA), confluence could be described as the development of a trading plan or strategy that takes into account different trading mETHods or TA indicators. In addition, the term may also be used to describe the combination of multiple trading signals, as a way to confirm the validity of a potential buy or sell signal.
To give an example, a trader that spotted a potential reversal price zone based on resistance and support levels. However, he also conducts further research by checking the position of moving averages to see if any of them suggests the same reversal zone. He or she also uses the Ichimoku cloud mETHod to further confirm the validity of analysis. This particular trader would probably make a very informed decision thereafter.
In conclusion, confluence meaning in trading is the employment of many various investment strategies or trading signals togETHer to make a much better informed decision.
