Introducing the Fibonacci Numbers
Fibonacci numbers are very useful in trading and all trading platforms offer the Fibonacci levels. Beside the Retracement tool, there are the Fibonacci Expansion, Time zones, and even arcs and other levels. However, they are all based on the same sequence and the projected levels are nothing but important support/resistance areas that start from the most important level, the golden ratio (61.8%), and move into secondary levels as well.
When looking at confluence areas, the term should be clearly understood in the sense that market is showing a stronger area to be broken if such a confluence of factors are coming in the same place.
In our case its about Fibonacci levels of different degrees that are around the same level. Elliott waves without Fibonacci it is simply not working and the fact that we can play with different degrees in terms of the wave structure but keeping in the same time the Fibonacci levels for the pattern we’re trading allows us to find strong support and resistance areas.
This in turn translates into great entry prices when trading forex with CFds or strike price with binary options.
What is a Confluence Area
A confluence area is defined as an area that is supposed to offer strong support or resistance simply because in that area different smaller degree support and resistance levels are to be found. These support and resistance levels are not mandatory to be and act like a classical one, but also dynamic support and resistance levels are qualifying.
To be clearer, a classical support and resistance level is one that is forming on the horizontal, while a dynamic one is always forming on the vertical. Fibonacci is one of the tools that makes it possible to find such areas that are difficult to be broken and if the confluence area is acting as a resistance, SELL contracts / PUT options should be traded, while if the confluence area is acting as support, BUY orders/ CALL options should be bought.
In order to identify such areas one should consider different patterns the market is making. For example, it is well-known that a triangle is the most common way a market is consolidating but also that a triangle is retracing almost always minimum fifty percent of the previous leg, regardless if the triangle is contracting or expanding.
That being said, the way to go is to measure the longest leg of the triangle and to mark the fifty percent retracement. The next step would be to measure the next leg and mark as well the fifty percent retracement. The outcome will be a confluence area that is difficult to be broken and by the time the triangle is finishing the e wave, any move into the area is a reason for entering the market.
Using the Elliott Waves Theory
Another possibility would be to use the Elliott Waves theory in order to find out confluence areas derived from Fibonacci levels. We know the most important Fibonacci levels are 61.8%, 50% and 38.2%. The way to go is to measure a move from top to bottom and then to mark with horizontal lines the three levels mentioned above. The next step is to go on a bigger time frame, and measure the move there as well with the Fibonacci retracement tool to find out those three levels and plot another three horizontal lines on the screen. If two or more lines are coming in a close distance, that area is being called a confluence area and in the future, whenever price is going to try to break it, it will have a difficult time. If the move comes from the upper side of the screen, so it’s bearish, market will most likely find support and BUY orders/ CALL options are recommended. On the other hand, SELL cfds/PUT options are recommended if the move is bullish as it means market will meet stiff resistance moving forward.
Finding Dynamic and Classical Support
By far, the most powerful confluence areas are the ones that combine both dynamic and classical levels of support and the way to identify then is by using a technical indicator, be it a trend indicator or an oscillator.
The best trend indicator for such a job is represented by a moving average that can be plotted on the screen, having different periods, and when the moving averages are crossing a classical support/resistance area for future price action is formed.
On the other hand, when the moving averages are traveling in perfect order, meaning there is no cross between them, then that represents a strong dynamic support or resistance area. When moving averages are meeting the previous classical support or resistance area, then the confluence area that is resulting is supposed to be extremely difficult to break.
Clear examples are coming with the two video recordings in this article – with both how to use the Fibonacci as well as building dynamic support and resistance levels.