Indicators are a wonderful thing, they can do a lot of our thinking for us, there are however problems with them and since they are becoming more and more popular, people seem to be adding hundreds of them to their charts which causes them to end up looking like a bit of a mess. Too many indicators can simply confuse things, you don’t really know what you are looking for and your actual strategy will be lost somewhere beneath them all. The other issue is that it takes away a lot of the skill from trading, simply using them as indications of when to trade means that you do not need to think anymore, everything that you learned before is going to waste.
If you are experiencing some of those issues, then there is something that could work for you, naked trading. We don’t mean getting all your clothes off, you are probably doing that already, what we are talking about is trading without any indicators. We need to remember that indicators are not designed to be signals, they should not be telling you to buy or sell, but that is how a lot of people arouse them. They are designed to simply tell you something about the markets, it should then be your job to use that information to make up your own trading decisions. We are going to be taking a look at what it means to be a naked trader and how you could potentially bring this idea into your own trading routine.
So let’s get a brief idea of what naked trading actually is, its main principle is that you will be looking at the markets it is current state, the price that it is currently at, we are not looking at the past prices and we are not looking at its potential future price, just what it is at right now in this moment of time. It is all about making trades and decisions based on the charts that are in front of you and nothing else. The difference between naked trading and trading with indicators is that you are required to have a good knowledge of different candlestick and chart patterns, hopefully, you should have already learned some of these during your initial trading training and education, they are afterall one of the main analysis techniques in trading. Price action is another bit of knowledge that you need to have a good understanding of, you will be using this to help work out your trades as it will make the markets a lot clearer for you.
Trends can be a naked trader’s best friend, understanding them gives you a greater understanding of the markets and the way that it generally likes to move in cycles. If we think of a typical market cycle, it will start ranging low, then start to trend upwards, it will then range high before a downtrend starts, it will then cycle like this, of course, that is a typical one and the markets don’t always play fair. These movements are however vital for a naked trader to understand. These patterns appear in all charts, not just the longer timeframes a good naked trader will be able to see the direction of these trends and will trade with them, not against them.
Understanding Market Psychology
Getting yourself a good understanding of the psychology that goes on within the markets will help you with your naked trading. There is something known as dumb money and smart money. When there is a huge candlestick forming, those that jump on it is what is known as dumb money they are simply throwing money into something that is already happening or has already happened. You need to get in before this, as after a huge buying candlestick, there is normally a lot of selling at the end, you want to be selling, that is market money. You need to be able to establish how the markets are moving. Or in other words, how volatile the markets are at that point in time. Volatility is great, it presents you with opportunities to get some trades on the go, of course too much volatility can be dangerous and can be made more dangerous when trading naked without any indicators to help you. Understanding this volatility and the larger movements are key to making profits when naked trading, ranging is a little trickier but can still be profitable.
Trend Lines and Support and Resistance Levels
When naked trading, you should still be using support and resistance levels as they can provide you with a lot of information about the markets. The thing to remember is to not draw too many lines, if you are writing on 100 lines then it will just become confusing, you need just a few and you need to ensure that you are constantly updating them, recent lines are far more useful to you than older ones. You should also only draw the lines that you are 100% sure of, do not try guessing where the resistance and support levels may be. It may not sound like naked trading anymore, but remember that you are drawing these yourself, not using a bit of software to do it for you, the trend lines can give you a real boost to your analysis and trading, so ensure that you at least try to use them.
So it sounds a little complicated, but who can actually trade naked? Is it for everyone? The simple answer is no, however you should certainly try it at least once. Even those that do not like it will still admit that they often look for price action first before then using their indicators, indicators are great for confirmations and can help to confirm whether it is safe to make a trade or not. Naked trading can also help to save time, you are trading in real-time and will not be overthinking your analysis which could cause a trade to pass by without you taking it. It can be simpler, less stressful, more precise and it takes less time. Having said that, you still need to set yourself a trading plan and some goals. Do not just go straight into naked trading without hanging ideas of the trades you want and when you should be getting into and out of the markets.
So you have decided to do some naked trading, there are a number of different things that you should be looking for, one of them are patterns, there are multiple different ones to think about covering the candlesticks and price action, so let’s very briefly look at what some of these patterns are.
Price Action Patterns
Let’s start with price action patterns, the first to look for is the Head and shoulders pattern. This is an extremely common pattern and you most likely would have seen it a number of times without knowing it. It is one of the key patterns to look for when naked trading. It is easy to notice as it consists of two shoulders which are lower heights and a head, or the highest point. More often than not when this pattern emerges it means that an uptrend is starting to tire and could be about to reverse into a downtrend. If you have a position open then it is a good idea to sell it before the market reverses. It can also work in reverse and would signal that a downtrend is about to reverse into an uptrend.
The other main price action pattern to look for is the Wedge, this pattern is also sometimes referred to as a triangle pattern and it can occur in a number of different ways which indicate slightly different things depending on the market condition it is found in. The wedge pattern is defined as a triangle, it has one long side which is accompanied by the price getting closer and closer together, the other sides are then drawn with trend lines. As the price gets closer than a breakout will occur and either a downtrend or an uptrend will occur. Normally, if there is a falling wedge pattern with the price slowly falling, then an uptrend breakout will occur, and vice versa for a downtrend. There can also be wedges without a rising or falling trend, which can make things a little harder to predict the breakout.
Those are two of the main price action patterns, there are then two main candlestick patterns to look out for. These patterns are based only on a small group of candlesticks, normally just two, three, or four of them. The first that we will look at is the Hammer, this pattern is a single candlestick that simply looks like a hammer, sometimes known as a pin bar. It has a long wick and a short body, it can sometimes be used to help indicate that a reversal is about to happen and can be seen at the top or bottom of a trend. The Engulfing pattern is the second one, this pattern consists of two candlesticks, it gets its name from the fact that the first candlestick is completely engulfed by the second one. This pattern helps to indicate that a trend reversal may be about to take place.
So it all sounds good, there doesn’t seem to be any reason not to naked trade right? Well not quite, it takes a lot of skill to trade naked, for many people, it is not something that they will be able to do straight away, it will take quite a lot of experience to do it properly and to be profitable when doing it. Many will argue that it is still better to use some indicators, especially when the markets are being a little funny. It is far harder to be a consistent trader when naked trading than it is when using a few indicators, if you are not fully reading and understanding the markets, then it could change without you noticing.
Our advice is to try trading with indicators, at least to begin with, if you are confident, and then try naked trading on demo account for a bit, if you do well, then move on to a live account, just remember that it takes a lot of skill, not everyone is cut out for it, so do not be afraid of giving it a miss after trying for a bit and going back to indicators, those indicators were designed to help you after all.