Naked Forex Trading, also known as price action trading, is the act of trading without using any indicators. Indicators are used to measure certain things about the market to help traders decide whether to enter a trade. Exchange rate, volume, or the open interest of a currency pair are common things that are measured by indicators. Many traders recommend that beginners start with naked trading before learning how to use indicators.
Naked trading is based on the present market, not past or future performance. Learning price action is key here because it will help traders to figure out which way the market is going to move. Decisions are made solely based on the candlesticks or charts one is looking at. This is a simpler trading strategy and decisions can be made much quicker because there is less data to analyze. Many naked traders use support & resistance levels and trendlines for better confirmation that a trade should be made. It is also important for naked traders to understand market cycles:
- Ranging lows
- Trending upwards
- Ranging highs
- Trending downwards
This cycle tends to repeat itself. One common rule is that traders should always trade with the trend, never against it. Of course, you’ll also need a good understanding of candlestick patterns and what they mean before you adopt this strategy. There are two main chart patterns that you should recognize if you’re going to take up naked trading:
- Head and Shoulders: This is a common pattern that shows up quite often or about every day. It consists of two shoulders, which are lower highs, and a head, which is the highest point. This pattern suggests that an uptrend is about to reverse into a downtrend or vice versa. If you have an open position, this is a sign that you should sell before the market turns bearish.
- Wedge Patterns (Also known as Triangle patterns): This pattern can signify different things in the market. It is a triangle with one long side followed by prices getting closer and closer together. The other two sides are drawn with trend lines. A breakout occurs when the price gets too close, resulting in either an uptrend or downtrend.
One key benefit of this type of strategy is that it can help avoid the pesky analysis paralysis, which delays trading decisions because of information overload, resulting in delayed trading decisions, or the inability to decide altogether. Still, this strategy isn’t perfect. Naked trading tends to focus on technical analysis, which involves analyzing charts, without paying much attention to fundamental analysis. Traders still need to watch an economic calendar in case events will affect their trades. It may be more difficult to trade ranging markets with this strategy, although it isn’t impossible. It can also be difficult to recognize certain chart patterns and to get used to trading without indicators if you’ve used them before.
To sum things up, traders should know that naked trading is simply the act of trading without any indicators. Decisions are made by analyzing candlesticks or charts and this method is strongly based on technical analysis. While some traders prefer this simpler strategy, others may feel more confident trading with the help of indicators. All traders should understand how naked trading works before deciding whether this strategy might work for themselves.