The Curious Case Of a Weak Japanese Yen.

It has been a few busy weeks for me and I have completely forgotten to update the blog. Today I found some spare time and I thought I would present my thoughts on some Japanese currency pairs. In my trading experience I have noticed that the correlation between EUR/JPY and GBP/JPY is very strong and when either pair presents a situation that is confirmed by the other pair it is wise to listen to the market. I was looking over the chart this weekend and I noticed that the EUR/JPY is forming a divergence setup when viewed on the monthly time frame. If you observe bellow on the chart I have marked a massive triple divergence that is showing on the Relative Strength Index. What is also very interesting to note is that the EUR/JPY has formed a big bullish rejection bar and the low of the bar could not be situated more perfectly. The low of the bar is sitting squarely on a support/resistance price pivot that goes back all the way to 2001. This in my opinion is a momentous occasion. This price pivot has not been visited in ten years and the reaction that is produced on the very first touch tells me that zone will be defended. There is a massive confluence of factors at play on this pair, we have triple divergence formed, a very bullish looking monthly candle and a historic price pivot @ 101.00 that has not been re-visited since 2001. Now the monthly chart are a great indicator of long term bias but it would be splendid if there was something that would give us a better clue on a lower time frame. On the second chart bellow I have marked a very nice "pin" candle that is sitting on a solid support area. The 105.00 pivot was very heavily defended in October and is now being used as support. This pair has started making higher highs already and it looks like for the medium term the bias may have shifted to long.

Having blabbered about the EUR/JPY for so long, let me shift the focus to the GBP/JPY now. If we look at the chart bellow for this pair there is a very similar situation. On the daily chart there are two "pin" candles that have formed, almost the same rejection bars as we see in the EUR/JPY. Also there is added support level @ 123.50 which was used back in August. Both Forex pairs have started making high highs already and there are many supporting factors between both pairs that are showing that at least in the medium term the monster downtrend that has been dominating the Japanese Yen might be at an end!

What Is Confluence in Forex?

In Forex, especially while studying technical analysis, you may hear the term "confluence" used in conjunction with trade setups. What is confluence and why should you care about it as a Forex trader?

Confluence refers to any circumstance where you see multiple trade signals lining up on your charts and telling you to take a trade. Usually these are technical indicators, though sometimes they may be price patterns. It all depends on what you use to plan your trades. A lot of traders fill their charts with dozens of indicators for this reason. They want to find confluence—but oftentimes the result is conflicting signals. This can cause a lapse of confidence and a great deal of confusion. Some traders add more and more signals the less confident they get, and continue to make the problem worse for themselves.

Most Forex traders who succeed do so with a minimal number of indicators on their charts. Two or three is a good number of indicators to aim for. Some traders use just one, and some use none at all—though it’s harder to find a good trade context if you don’t have any at all.

Here is a good example of using confluence to place a great Forex trade. Say you trade using price patterns formed by the candlesticks on your chart, and you see a pattern which signals a "buy" trade. While the price pattern itself might be all you need to be right 80% of the time, perhaps you’ve discovered that confirming the pattern with some confluence can help you to be right 90% of the time. Maybe you’ve tested and discovered that Fibonacci retracement levels can help you find a good context. If your price pattern which signals "buy" lines up with a Fibonacci retracement level which is acting as support, then that is a great example of an "A" trade confirmed by confluence (the price action and the Fibonacci level). Note how this is not a cluttered Forex system. Aside from the Fibonacci levels, there are no indicators drawn on the charts at all. All you’re looking at here are price patterns. You only overlay the indicator when you want to check the context surrounding a price pattern. If you notice that the retracement level matches up with a pivot point you’ve been keeping an eye on, that’s another form of confluence.

This is only one example of using confluence in Forex. There are many different ways to use confluence. Systems are as varied as personalities. Test different combinations of signals to determine the best Forex indicators for you to use. Experiment and see what gives you the best statistical results over a large number of trades using historical data. Maybe you’ll find that using confluence of moving average crossovers combined with Fibonacci levels gives you great results. Maybe you’ll discover that Bollinger bands used in conjunction with support and resistance tests well. One thing which is important to note is that when you experiment with confluence, you need to choose indicators which are independent of each other—not calculated using each other. Otherwise you will stack up time lag, which will decrease accuracy.

Confluence is beneficial because it does more than show you a good setup in isolation—it shows you a good setup in context of the market. This is essential in Forex to avoid fake outs, unexpected reversals and trading against the trend. In a way, most Forex systems are built on the idea of confluence. If you haven’t found a system you like, this is how you can start building one from scratch. A good system will show you what’s going on right now, and how it fits into the bigger picture—and how you can profit from that knowledge.