Do you find yourself getting confused with too many indicators? Then naked forex trading might be for you!
Naked forex trading is trading without the aid of indicators and can also be called ‘price action trading’.
Some may advise only using up to two indicators, but naked traders wouldn’t recommend any.
The thing about indicators is that they are not signals to buy or sell.
They are only telling you a certain thing about the market and it is your job as a trader to decide if they are worth trading if they meet the criteria you are looking for.
In this article, we’ll explain what naked forex trading and how you can incorporate it into your trading style.
What is naked forex trading?
Naked trading is based on the market in its current situation; its current price, not future or past price.
It is all about making trades based on the candlesticks and charts in front of you, nothing else.
Before you attempt naked forex trading, make sure you have a good understanding of the different types of candlestick patterns and what they mean.
Learning to read charts and candlestick patterns is a vital part of learning how to become a forex trader.
If you do not learn how to analyse these, it can be hard to learn how to trade.
Knowing how to read charts and candlestick patterns should be one of the first things traders learn.
Some traders would even recommend learning how to trade naked before learning how to use indicators.
Indicators are good only for past movements, they are not so good at predicting future movements
You need to understand what price action is, not to just trade because an indicator or two told you to.
By learning price action, you can see more clearly what the market is doing and the direction it will likely move.
Naked trading also means simplifying your trades. By cutting out indicators, you are trading based on the situation, nothing else.
Naked trading can be considered a form of technical analysis as you are only analysis the information in front of you.
That said, fundamental analysis should not be ignored, it is still useful.
Ideally, you should still be watching your forex economic calendar to know when big events may take place.
Some traders opt to stop trading when these events take place others try to trade the volatility they may bring.
Understand trends
A key thing naked forex traders need to understand about the market is that it moves in cycles.
A typical market cycle may start at a ranging low, start trending upwards, then start a ranging high, then a downtrend will emerge, and then start all over again.
These movements are vital to understand in naked trading.
They don’t just appear on large charts; you can also see such patterns on small scale charts as well.
A good naked trader will know to trade in the direction of these trends, not against them.
Understand market psychology
You need to get into the market before the dumb money does.
Don’t be a trader that takes part in the large candlestick shooting upwards, get to the party early because very often what follows that large candlestick is a lot of selling.
You want to be the person selling, which is known as ‘smart money’.
A wise trader also needs to establish how fast the market moving. Essentially, how volatile is the market at this point?
Volatility is a good thing because it presents opportunities to get involved in the market, though too much volatility can be dangerous, especially without indicators.
That said, ranging markets are not completely impossible to trade in naked trading.
Trend lines and support and resistance levels
Naked traders may still use trendlines and support and resistance levels.
An important thing to remember about support and resistance trading is that you shouldn’t draw too many lines.
Draw only the levels you are completely sure about, no more than five at least. More recent lines are more relevant than older lines.
If you really want to give naked forex trading a try, but still want confirmation to make a trade, then it would be a good idea to use trendlines or support and resistance levels.
Can anyone trade forex naked?
Naked trading may not be for you, but it is still useful to learn. Every trader should try it at least once.
Even if you don’t like naked trading, some traders advise that you should be looking for price action first and then looking at indicators second.
Indicators can be used as confirmation that it is safe to make a trade. This can also be called ‘confluence’, which is where two or more signs are telling you that you should make a trade.
By naked trading real-time situations, you will also save time as you are not thinking about analysis and missing important opportunities.
This makes trading simpler, less stressful, and more precise.
That said, you still need a plan and to set yourself appropriate goals. Don’t jump into naked trading without an idea of when you should enter and exit the market.
Two common price action patterns to look for
If you do decide to take up naked trading, then you should be able to spot these common candlestick patterns.
Remember though, these patterns are largely subjective. What you label as a pattern, others might not.
Head and shoulders
The head and shoulders candlestick pattern is very common and can be seen in most trading days. It is a key pattern to look for in naked trading.
It is also easy to spot. Quite simply, it consists of two shoulders (lower highs) and a head (the highest point).
When you see this pattern, it usually signifies that an uptrend is about to reverse into a downtrend.
If you have a position open, it is a good sign that you should sell before the bear market begins.
The head and shoulders pattern also works in reverse as well and can signify that a downtrend is about to reverse into an uptrend.
Wedge patterns
The wedge pattern (also known as a triangle pattern) can take place in several scenarios and can signify different things depending on the market situation it is found in.
A wedge pattern is defined as a triangle with one long side followed by price getting closer and closer together. The other two sides are drawn with trend lines.
Eventually, when prices get too close, there is a breakout and a downtrend or uptrend will emerge.
Typically, a rising wedge pattern, where the price is slowly increasing, will end up with a downtrend.
And a falling wedge pattern will do the opposite, emerging as an uptrend.
Sometimes a wedge pattern will emerge that is neither rising nor falling. These can be harder to predict what direction they will go.
Remember to always look for confirmation before entering the trade.
You can check out more price action patterns here.
Two common candlestick patterns
Candlestick patterns are patterns based solely on small groups of candlesticks, usually two to three.
Again, these patterns are very subjective. You may see them frequently in naked trading or not at all.
Hammer
The hammer is a single candlestick that gets its name because it looks like a hammer. Some people also call the hammer pattern a ‘pin bar’ and it is a popular candlestick to trade in naked trading.
It is characterised by a long wick below a short body.
Usually, the hammer pattern signifies that a reversal is about to take place when seen at the bottom of a trend.
Engulfing pattern
The engulfing pattern consists of two candlesticks with the second candlestick completely swallowing the first.
It signifies a trend reversal is about to take place.
You can check out more candlestick patterns here.
Problems with naked forex trading
One downside to naked forex trading is that it requires a lot of skill.
For many traders, it is not something they can do immediately. It takes a lot of time to recognise the way the market will likely move.
In risky situations, it may be best to use indicators to be completely sure it is safe to make a trade.
Another con of naked forex trading is that it can make it harder to be a consistent forex trader.
You also need to rely on your intuition which can take a long time to develop. So, don't expect to be profitable immediately. As your instincts get sharper so will your timing as well.
Learning naked trading is a bit like learning how to drive a car. You need to learn how to feel the car, what it needs.
When to change gear for example. If you are not in rhythm with the market, it can bite back.
It may be best to start trading with indicators first and then move on to naked forex trading.
Or at least practice in a demo account or simply watch the market and see if you can predict what movements will take place based on your knowledge of candlestick and chart patterns.
To create a trading strategy that works for you, you need to try many different strategies.
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Key points
If you remember anything from this article, make it these key points.
- Naked forex trading is when you trade without using indicators. It can also be called price action trading.
- Traders need to understand that the market moves in cycles. You should be trading in the direction of a trend, not against it.
- Naked forex traders should be able to spot common price action and candlestick patterns. This is regarded as a form of technical analysis.
- In some situations, it may be wiser to rely on indicators. Indicators can act as confirmation that it is safe to make a trade.