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 may 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 may 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 may 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.
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