Naked trading is simply trading virtually “indicator-less” so you can see in real time what is going on with current price action without it hiding behind a mess of indicators.
It is better known as price action trading where you may trade candlestick chart patterns or even singular patterns such as a pin bar.
There is one particular naked trading pattern I like to use and that is what is called a failure test which looks to take advantage of traders trapped in an adverse position.
Without the use of indicators some may say that naked chart trading is highly discretionary.
You can have a rules based approach that makes your choice to trade objective and we will discuss that here.
Naked Forex Trading Example
Let’s say you are a Forex trader and are scanning four hour charts
As you look at the chart, keep in mind that price is in a downtrend and the naked way to note the trend is lower highs and lows for a downtrend
When looking for currency pairs to trade, you look for strong momentum candles against the overall trend direction.
Large green candlesticks entice other traders to pile in long – because “this time we are heading to an uptrend!”
After you find a FX pair that fits, you mark off previous zones where price rejected from in the past.
If price rejected there, there is a good chance it could happen again.
As we look at our chart, price rockets into a resistance zone, stops, and sets up an obvious one bar reversal candlestick pattern.
Why is it an obvious reversal candlestick?
Note the lack of momentum after a huge thrust upwards. Higher prices are rejected as noted by the long upper shadow (popular candlestick pattern).
Price closes virtually where it opened and near the lows. This, along with the downtrend, gives the probability of more downside, not upside.
- Your sell stop goes below the low of the reversal with a stop loss above the highs. (We are taking advantage of at least short term momentum in our direction)
- Your profit target is the previous low. If the downtrend is going to continue, price has to come back to this point on the chart. (lower low for a downtrend)
Price drops, consolidates with the hopes of higher prices, but then collapses aided by longs selling out of their position.
Without an indicator, you can see momentum in price movements, zones where price has potential to react, and where the buyers and sellers do battle.
Stock Trading As Well
This is a 10 minute stock chart and imagine that you like to trade ranges on an intra-day basis. Just using naked price, how do you spot a trading range?
Remember trend structure of higher highs/low are for an uptrend and once we fail to make a higher high (red circle), we should be on alert for a possible trading range.
Once price takes out the low that underlined, we are at risk of starting a change of trend. Between the high and the low, we look to range trade.
- Look for price to be in a trading range
- When price reaches the extreme edges, look for some type of entry trigger
- Target the opposite side of the range
On this chart, on the left we have price reject lower lows and form an inside candle which equals a form of consolidation. Trade long on break of high of inside candle and monitor the high of the previous candle for stalling or complete rejection.
The last trade is a strong rejection of lows and an obvious reversal. Enter on break of high is the usual entry trigger.
Using Chart Patterns
Another approach naked traders will use is simple chart patterns. I’ve talked about bull flags and bear flags on other articles but with this topic, I have to mention them again.
I don’t get caught up in perfect patterns or textbook definitions. To me, these are simply pauses in the market action and I find entry triggers to get back in.
We have an uptrend here and you can see price pulls back to varying degrees.
Without using a trading indicator, you can:
- Find ways to enter trades – price rejecting lows via reversal candlesticks, entering before the breakout/on the breakout
- Stop loss locations can be just below the lows (uptrends)
- Profit targets can set using heights of the move up prior to the pullback and projected from breakout area.
- Trailing stops can be used by placing under each new swing high or under X amount of candlesticks back from the current one
Of course there are other patterns such as double bottoms/tops and ranges in a trending market that you can use.
Trading Naked Tools
To start to wrap up, what have we talked about in terms of being able to trade without indicators?
- We can determine trend direction by using a trending structure of higher highs/lows as well as lower highs/lows
- Trading ranges can be signaled when our trending structure begins to change
- Some trading ranges can be traded when you see an obvious support zone as well as resistance zone
- Simple candlesticks patterns such as inside bars and pins bars can be used to enter trades
- Chart patterns are just pauses in the market and take various forms including a flag formation
Do we need indicators for stops or profit targets?
We can use measured moves (the length of the impulse move before the pullback projected from breakout) to trading the opposite side of a trading range.
Can we use trading indicators?
There is nothing inherently wrong with trading indicators but it’s the use of indicators that is the problem.
It’s the failure to understand what the indicator is telling you.
For example, I often use a variation of trading bands to help scan for overextended markets that may be ripe for support/resistance failing type of trades. It is also a precursor to a reversal trade.
I will use a momentum indicator to also make it easier to spot momentum that is decreasing or increasing. A trading setup will depend on the context we find ourselves in.
In the end, it will be the structure of price that you can see on a naked chart that will determine if a trade is going to be place and the indicator information is supporting the decision.