When traders refer to trading naked, they are describing a forex trading technique which does not include or require the use of technical indicators. Whilst this form of trading is cannot be considered non-technical, it uses theories based on ‘price action’ in order to speculate on future currency price movements. Rather than using a technical indicator window, such as the Relative Strength Index, MACD or custom indicator codes, price action traders look within the price charts themselves to spot potentially profitable trading opportunities. Using a number of basic but skilled observations, price action traders try to map the price chart in order to determine where to place their forex orders. If the sight of too many flashy indicators and colourful lines on your charts is negatively affecting your trading, this form of naked trading january help you to become a profitable forex trader.

Learning how to spot the key areas on a forex price chart

Once of the key elements of price action trading is to be able to accurately spot areas of support and resistance on a price chart. Fortunately, these areas are often obvious however they do vary in significance. Each time that a price reaches a new high or low and retraces, for example, can be considered price hitting an area of support or resistance. This can be described as those prices on any chart where traders are looking to place orders in the opposing direction. They vary in significance depending on the amount of times they have been tested and the number of times they have held up and managed to send price the other way. Interestingly, areas of resistance often become areas of support once they are broken so the most significant of all are those which have been around for a long time acting as both on a longer term chart. Some areas of support and resistance january be several years old on a daily chart with less significant levels being observed on any hourly forex chart.

Spotting trading opportunities on different time frames

Once the key areas of support and resistance have been noted on the higher timeframes, many price action forex traders drop down the time frames to look for possible entries when price nears these important zones. Traders are looking for specific price action setups at these levels which will indicate that the area of support or resistance has held up or january be broken. These setups are visible on all regular forex price charts but are most clearly highlighted using the candlestick format. An example of this is when an area of support is reached on a daily chart and a clear reversal setup forms on the hourly candlestick chart. For price action traders the setup is compounded by the location of price (without the need for an additional indicator to confirm this) and a high-probability trade can be taken from here.

Reducing the risk of analysis paralysis

Trading without indicators in this way has a number of benefits. Not least the prevention of so-called “analysis paralysis” where the over use of conflicting indicators prevents trades being taken. By simply plotting the known areas of support and resistance, a trader can use price action analysis to not only spot potentially high probability setups but also learn how to read the market and understand where price is likely be heading in the near future. This is what naked trading is all about and why many forex traders are reducing their reliance on indicators to pre-empt the most reliable market moves.

For many new traders, developing a trading style that suits their ‘trading personality’ will begin with the decision of whether they want to trade shorter or longer time frames. This will generally be based on how much time each trader has to dedicate to trading forex and also whether a preference for faster, short-term trading is more suitable than looking for longer term opportunities. The most extreme difference between these two forms of trading can be described as scalping (trading using very short chart analysis) and swing trading (trading using longer term chart analysis). Each can be highly profitable but also rely on different styles and methods of trading currency movements.

Scalping in forex

Scalping is the idea of forex trading that most new traders will be familiar with. It is the exciting, high speed day trading that is based on traders taking several rapid trades through the analysis of low timeframes such as 5 minute, 1 minute and tick-charts. These charts show the highly detailed movement of price and require traders to make fast trade entries when a setup becomes apparent. These forex trades can be closed after only a few moments and with a profitable gain of just a handful of pips. This style of trading relies on a high number of successful small trades rather than holding the trade as an investment. As the name suggests, scalping does not try to make the most out of swings in the market price, instead scalpers look to only make a profit from a small part of this and exit the market before the move is over. Although it is perhaps the most attractive and exciting for new traders, scalping can be high-risk and is a method employed by many experienced forex traders.

Swing trading currency movements

Swing trading is for traders who prefer to use fundamental or technical analysis to pinpoint longer-term trading opportunities. The basis of swing trading is that a trade is taken with the view to holding this position for several hours, or perhaps several days or weeks, in order to take advantage of larger movements in price. Unlike scalping, swing traders look to make a large number of pips and typically employ larger stop-losses in order to catch the main swings in the values of currencies. For those who are able to spot the start of a trend, this can be a highly rewarding and profitable style of trading, with the potential to move stop-losses as the trade develops. Also unlike scalping, traders will often wait for confirmation that the swing is over before exiting in an attempt to trade the entire swing and increase the likelihood of maximising pips.

How new traders can approach scalping and swing trading methods

Regardless of the amount of time a new trader has to dedicate to trading, it is often considered best to begin to initially look for swing trading opportunities rather than scalping trades. Scalping involves an intense and confident approach to trading which is exciting but potentially destructive for new forex traders. The temptation to take multiple trades whilst watching every market movement january actually be less rewarding than one, single good swing trade. Swing trading not only reduces that amount of time that a forex trader needs to dedicate to screen-time, but it also helps to develop the skills of risk management alongside the importance of “letting profits run”. Many professional traders see the enhancement of these skills as an excellent foundation for the exciting world of forex scalping.

Candlestick analysis is by far the oldest method of speculating if the market price of a currency will move higher or lower in the near future. Developed over 500 years ago by Japanese rice traders, the technique aims to look for specific patterns and formations of ‘candles’ within a price chart. Despite its age, it is widely known as one of the most powerful techniques available to modern forex traders with many of the original patterns being incorporated in trading strategies today. As a predictive tool, candlestick price charts can be used in conjunction with a wide range of forex trading indicators and can even be used as a stand-alone tool for currency trading.

What are candlesticks?

Candlestick charts differ from a regular price chart in the formation of the individual bars representing the time frame of any given chart. Whilst traditional price charts will generally be made up of bars showing the open, close, high and low of a time period, candlesticks attempt to visually enhance this in order for forex traders to easily read the markets and identify high-probability trading opportunities. Their name comes from their shape with the open and close of the price bar representing the candle ‘body’ and usually filled in with a colour to show that the bar closed higher or lower than its open. From this body, it is possible that a ‘wick’ emerging from the top or bottom of this will show traders that price moved in this direction before being pushed back within the body of the candlestick.

Candlesticks are effective in predicting future price movements

The formation of the individual candlestick price bars within the price chart can provide forex traders with a deeper understanding of the underlying strength and sentiment within a market. Those candlesticks, for example, with a long body will demonstrate a powerful market move, whilst those with almost no body at all (often referred to as doji’s) will represent a period of indecision or reflection in a market. A long wick at either end of the candlestick will show that traders tried to push the price higher or lower before being pushed back towards the body of the candlestick. This can mean that there january be a large area of support or resistance causing the rejection of price at these levels or, when this occurs in the opposite direction after a long trend, that price is testing the possibility of a reversal.

Using the most popular candlestick patterns in forex trading

By far the most popular and successful way to trade with candlesticks is to look out for candlestick patterns often formed by more than one individual candle. Not only to these have several hundred years of back testing completed but they are also highly reliable across all time frames and january be applied to all price charts. Some of the most popular can be used in conjunction with identified areas of support and resistance in order to maximise their profitable potential. Of the many recognised patterns, there are a handful of the most popular and therefore most important candlestick patterns. A highly popular example of this is the ‘shooting star’ candlestick pattern which is a single candle with a small body and a wick several times larger in either direction. When this occurs near the end of a trend, it often indicates that a reversal is due within the markets. The long wick represents the failed attempts of traders to push the currency pair higher or lower in order to maintain the trend. Forex traders who spot this candlestick can therefore begin to prepare for price to move in the opposite direction and to enter the market as early as possible.

With the explosive population of forex trading over the past ten years, spurred on by the growth in global internet access, choice of both platform and broker have become vast. Hundred of brokers offer access to currency markets and, on the face of it, they appear to offer largely the same services. For new traders there exists a confusing world of offers, bonuses, spreads and leverage which each attempt to convince us of the suitability of the broker. The truth is that many individual traders will be attracted by one or two of these features, depending on trading preferences, startup capital and risk tolerance. Beyond this there are other considerations which make forex brokers distinct from one another.

Forex bonuses and incentives to join

Many forex brokers will offer incentives in the form of cash bonuses and additional incentives to traders who sign up and begin trading. On the one hand this is an incredibly helpful boost to the account of any new trader, but on the other it can cause problems depending on the level of trading experience that a new member has. Whilst experienced traders january amalgamate a cash bonus in to their account and begin trading as if it is their own money, using a strict risk-management strategy, the temptation for many is to treat this as free money to gamble. Similar to trading using a demo account, free cash bonuses prevent that essential real-money experience and can encourage cavalier forex trading. Although this is not a definitive rule it is worth considering for new traders who hope to trade beyond the bonus. Once this has been depleted there january only exist bad habits and low self control when it comes to trading the real deposit.

Spreads and leverage for new forex traders

Spreads are the place where brokers traditionally make their money. This is the difference between the buy and the sell price when a forex trade is placed and times several trillion transactions amounts to a substantial sum. It also accounts for the steep rise in the number of brokers as currency trading has spread to the retail traders market. In a nutshell, the closer the spread the nearer to the underlying market price your purchase will be which is a positive thing. Wide spreads mean forex trades are down a few pips before the trade has even got going. Researching brokers with consistently close spreads will therefore help all long-term trades cut costs and increase profits over time.

Leverage is one of the most enticing and powerful features of forex trading. It allows traders to command many times the amount of their deposit in one single transaction, magnifying profits but also that of losses. For inexperienced traders, more leverage is almost certainly not better and can lead to overexposure and rapid depletion of a trading account. Even for more experienced traders, it is very rare for the maximum leverage to be used on any trade and many brokers simply use this as a marketing tool to show how hugely profitable a small deposit could be.

Educational resources and learning areas

By far the most important consideration for all new traders will be to sign up to a broker that genuinely wants to work long-term with its clients. The way that this is done is to offer a multitude of free and accessible trading educational resources. Some brokers are exceptional in doing this, offering demo platforms, webinars, trading strategies and money management courses within their trading platforms. This should be the first consideration of joining any broker and one which will hugely increase the potential for long-term trading success beyond the temptations of cash offers or sky-high leverage.

 

Breakout trading can be a highly effective technique when trader’s make the correct decision on a large, profitable, market move following a period of consolidation. These areas of consolidation are very common across all time frames and are formed with continuous sideways movements, between areas of support and resistance. Very often, this evidence of an undecided market, where neither bulls or bears control the short-term trend, results in price ‘breaking out’ higher or lower with substantial momentum and provides an excellent trading opportunity.

Trading breakouts with a conservative trading strategy

Breakouts are obvious when price bursts through an area of continuous support or resistance but knowing if price will continue in this direction if often not immediately clear. The reason for this is the existence of ‘false breakouts’ whereby price appears to move out of the area of consolidation before reversing and returning to this area or even moving to breakout in the opposite direction. Taking a trade as soon as the breakout occurs can leave traders trapped if price reverses and therefore many will prefer to wait for confirmation of the breakout before entering. This is known as a reasonably conservative breakout strategy and, although some opportunities january be missed by employing this, it is highly effective in lowering the risk of losses.

The strategy involves waiting for the initial breakout to move beyond the area of support and resistance before returning to this level as many breakouts invariably do. This is known as a retest of the breakout level in order to prove that this has now become a new level of support or resistance and price can continue in the direction of the breakout. With false breakouts, this level will not be proven to support the breakout and it is likely that price will crash back through this. On the return to this level, traders january look for key signals that support the direction of the breakout. This can be in the form of reversal candlestick patterns, or technical indicators which can both provide an idea on whether the market considers the initial breakout to be genuine and confirmed.

Aggressive breakout trading

For short-term news traders, breakouts often occur in the seconds and minutes after significant news is released to the market. If the news is relatively unknown or likely to have a strong impact on forex pairs, it is typical that the markets january move sideways in the lead-up to the release. Cautious trading will be evident with price moving between a lower and higher support and resistance level as the market waits to find out which way to move. This provides breakout traders with an excellent opportunity to catch large movements immediately on the release, although this strategy favours those with nimble fingers to react with the market.

An additional way to aggressively trade a large news release is to patiently wait for the market to react before entering a contrarian trade when these become over-stretched. The assumption here is that in the minutes following a news release, the high volumes of buying or selling cause the market to overreact which will often result in a breakout to spike higher or lower followed by a period of consolidation or a slight retrace of this move. Assuming that currency markets will return to normal trading shortly after the news is released provides an opportunity to trade against the breakout when price begins to falter. Although this is a strategy best employed by experienced news traders, it can be witnessed frequently with both candlesticks and indicators assisting traders to pinpoint when the market january be overextended.