Are you wondering what is naked forex trading?
What naked forex trading means is simply trading without the use of technical indicators.
Traders who use naked trading techniques focus on the price chart, whereas traders who use standard technical indicators focus on the indicators.
This is not only a simple but also a superior way to trade; best suited for those traders looking to attain expertise with a given trading method quickly.
Indicators are used to analyze the behavior of a currency pair’s price action to predict the direction that the pair will take in the future.
With time, traders can create their own unique trading strategy by finding the few key indicators that give them the best result.
When it comes to naked forex, indicators will only be used under special circumstances when a risky situation arises.
Naked trading has always relied on the movement of prices, and whether this strategy is superior over other traditional methods used in forex trading remains debatable.
In the modern world, forex trading has come to be known as one of the most profitable yet dangerous form of financial investment.
A lot of money is traded every single day (over $5 trillion), and every trader intends to make a profit. This isn’t always the case, as many traders end up losing their money due to the high-pressure stakes that come as a result of the volatile nature of the forex market.
Because of the difficulty or impossibility to control the FX market, one can only make an educated guess with the hope of maximizing profits and minimizing losses.
Most forex traders today rely on the technical analysis from books written for forex, stock, futures and options traders.
This is what has made naked trading in the forex market quite popular. Long before the technology of calculators and computers, traders were trading naked forex.
Naked forex is the oldest and simplest trading method.
Naked Forex or Indicators?
In as much as trading indicators can add value in certain instances, such as finding consolidation during a quick scan, they should not be the main driver of your trading decisions.
Since the majority of trading indicators are a derivative of price, you may want to reconsider your stance on this, as you are a little late for the party.
I normally think that trading without indicators will be more beneficial since it helps you to understand the compete story. This is because you are able to analyze your charts from left to right while employing naked trading.
Using converging moving averages to find consolidation
When two moving averages are compared during a scan in a chart, potential trading opportunities can be highlighted.
The same thing can be seen with a naked forex chart, but this is a simpler and easier way to scan multiple instruments at once using a technical indicator.
Naked Forex Chart Example:
Markets will alternate between trending moves and the compression of prices; hence, there’ll be opportunities in both markets, whichever one you choose because:
- Once a consolidation area has been found in the market, you will now have the opportunity to play a support holding or failing play.
- You have the prospect for continuation moves or trend termination plays when markets are trending.
Due to the nature of the markets, there are trends that we see from time to time. These trends form a normal curve when represented in a curve.
During the mark-up phase, the ‘big green candle’ in curve attracts the eyes of the traders who jump into the move. Because more shrewd players are in the move prior to the break, we can say that these traders are late for the party.
Prior to the break, in the accumulation area, there is a price sitting up against resistance in a two candle range. This can be an opportunity for a trade where there’s a possibility of two things happening:
- Resistance is likely to hold, and you can play a short back into the consolidation.
- Resistance will fail, and the price will rally to the top
Whereas some traders tend to use a rate of change indicator or other things to show momentum, the actual price on the chart can be shown on the lower time frames. These moves happen on every timeframe regardless of whether you day trade, swing trade, or look for position trades. All these are viable trading facts that you can profit from.
Pros and Cons of Naked Forex
Pros of Naked Trading
- Traders have always been debating on the merits of following price action with clean charts versus charts loaded with what seems to be useful technical indicators. In the most likely scenario, traders often juggle both scenarios as they struggle to find what works best for them.
- Supporters of naked trading, however, argue out that using indicators in trading can be compared to relying on training wheels to ride a bike. At some point and time, you will have to take the wheels off and learn to balance on your own.
- Naked forex will allow you to have a taste for the market and helps you predict when a currency pair will make a significant change in the movement of its position.
- Owing to the absence of several technical indicators, traders will be able to redirect their focus towards experience gaining and perfecting their timing. At the expense of missing out potential price changes happening right in front of their eyes, beginners become enclosed in analyzing trends. In general, naked trading is arguably a simpler approach to take.
Cons of Naked Trading
- When it comes to the other side of the coin, pundits argue that naked forex is an advanced form of trading. This takes a lot of experience and several trials and errors before making any profits.
- Survivorship bias. This tends to be high where one successful trader proclaims the benefits of naked trading and other traders fail to profit from this strategy.
- Naked forex requires some expert-level guidance and the correct knowledge in order to succeed. By the end of the day, what really matters is finding a strategy that works for you, be it naked or any other, and go with it.
One thing I can assure you is that naked forex trading will make you a better trader since you get to analyze charts from a perspective of wanting to grasp what is going on. The moment you comprehend how the market operates, you will be seeing numerous entry signals with a higher probability of working out for you.