Confluence in Trading – I Draw Charts (David Holt)
Any technical trader worth their salt has a collection of setups in their repertoire which comprises their bread and butter in the market. These patterns play out regularly on the chart and because of a large sample size, can be calculated for average probability/profitability. This is where a technical trader finds their edge. But what about setups which outperform, or perform better in certain scenarios than they ought to? More importantly, how can we determine these ahead of time?
In this article, I’ll be sharing some of my confluence indicators. These indicators alone will never trigger a setup, but are used to increase my confidence in trades I may not have entered due to indecision. This is a very small subset of trades, but they can have an out-sized impact on your edge over the market. More often, these indicators have signaled that a trade is less ideal than first believed, and therefore save me from stopping out.
Before jumping in, it’s important to note that some of these indicators may be used successfully and independently by other traders, however they do not fit my personal style as a primary method of determining entries and exits. What serves as confluence will vary between individual traders.
Heatmap charts, such as those offered on TensorCharts (link) can be useful on smaller timeframes in determining which side of the market is being stacked by large players. Displayed in a colorful format; it becomes easy to identify where large orders are resting. If your trade thesis relies on a specific level being held, it may be worth checking a heatmap chart to ensure there are large numbers of market participants ready to hold that level. A lack of orders there would indicate a higher possibility of failure, particularly during times of high volatility. A heatmap chart is a more convenient way to view the orderbook as well as price simultaneously. It is not so much an indicator as it is an aggregation of data that would otherwise be more difficult to interpret in real time (at least for humans).
Open interest is a metric that counts how many futures (or options) contracts are currently in existence. It’s displayed on Bitmex (the largest crypto futures exchange)in ticker format, or in a chart on Tensorcharts. As price moves, the open interest changes based on the size of positions being opened or closed. If price moves to an important level and open interest increases, there is a good likelihood that the rest of the market views this level as important, and is responding to it. If open interest remains the same or drops, this usually indicates either profit taking or liquidations during the move, but does not yet indicate a shift in sentiment. The exception might be at the end of an over-extended market with an extraordinary amount of participants highly leveraged.
Checking the OI sometimes prevents me from entering at levels I considered important when the market did not agree with me. I’ve found it best used as a disconfirmation indicator when I am unsure.
Funding rates (sourced from Bitmex as they are the largest source of real volume in the Bitcoin/Ethereum markets) have a larger impact on the market than many people may believe. Without going into technical detail on how the funding rate works and is calculated*, the general effect is that funding is debited or credited every 8 hours based on the premium or discount between the spot and perpetual swap contract markets for Bitcoin and Ethereum, and which side of the trade you hold. For example, if you are long while futures are at a premium, you will be charged a small fee which is paid to those on the other side of your trade.
This alone is not usually enough to flip market sentiment, however during times of high volatility, the funding rate can get quite high as the spread between spot and futures can get quite wide. I keep an eye on funding, as after periods of volatility a flip in funding is usually indicative of market participants taking profit and arbitrage being accomplished (equalizing the market) and can signal an incoming relief bounce or even a full reversal.
Funding is a more subjective read than other confluence indicators as it’s difficult to draw a conclusion as to what other market participants are doing, however it can help to reduce risk in positions if it is in your favor.
These are not the only confluence indicators which I use but they are very helpful, and widely accessible. It’s important to note that they are based around my personal trading style, which is best described as level-to-level trading during trends. These tools are chosen to help me identify possible reactions to levels I deem important. They may not be helpful to all traders, or be right for you. It’s easy to be overwhelmed by data when trading, so whatever you choose to use, make sure it compliments your style of trading and does not detract and distract from it.
Thanks for reading! If you enjoyed this article please leave it a few claps and give me a follow both here and on twitter @IDrawCharts for more!
Published at Tue, 27 Aug 2019 00:04:53 +0000
Bitcoin Pic Of The Moment
By CashlessWay – Global Hub for ePayment Culture on 2014-06-28 09:38:52
