Trading naked is when a trader doesn’t rely on indicators to establish entry and exit points.
The advantages and disadvantages of trading naked are hotly debated among traders, especially in the foreign exchange community. Advocates say that trading naked, also known as ‘price action trading’, allows a trader to be as close to the trading action as possible as it relies solely on live prices.
Is trading naked a good strategy for new or experienced traders? This guide on how to trade naked will take a look at its pros and cons.
Trading indicators aren’t a bad thing
As previously noted, naked trading doesn’t rely on trading indicators. But what’s an indicator? Simply put, an indicator helps a trader predict market behavior and identify trading opportunities. There are many indicators, including:
Relative Strength Index (RSI): an indicator that quantifies from 0-100 the strength or weakness of evolving price action.
Fibonacci retracement: an indicator that attempts to inform a trader of potential reversals.
No indicator can guarantee an asset’s price movement, which is why some traders prefer a trading strategy without indicators. After all, an indicator is not a buy or sell signal. Rather, it provides information a trader can choose to heed before making a decision.
Nevertheless, new traders should take time to understand indicators. Learning how to read charts and candlesticks is a priority. Indicators give a deeper understanding of how markets move. They enable traders to see and comprehend patterns in an asset’s price action.
Naked trading doesn’t involve indicators, statistics and complex maths. It uses real-time data and other information.
By removing indicators, you take away some complexities associated with trading. But what’s left? Does naked trading rely on gut instinct? To some extent, yes. After all, if an indicator suggests there’s a 75% chance a forex pair will rise, there’s a 25% chance it will drop or remain unchanged.
And what happens when indicators give conflicting signals? For example, one indicator says a forex pair is a definite buy while another strongly suggests a sell. For some traders, there could be a hierarchy of priorities, with one indicator taking precedence over another. But for others, especially new traders, conflicting data and information is a recipe for confusion.
Trading naked eliminates these potential distractions, focusing on live price action.
Naked forex trading: back to the basics
Naked trading is very popular in Forex. One major benefit of trading naked is that it eliminates the need to analyse complicated technical patterns, which may delay trading decisions and lead to information overload. Instead, you get a clear and simple chart to base your decision on.
If trading naked doesn’t make use of indicators, what exactly does naked forex trading consist of?
Naked traders look at charts in real-time. They can select the time frame they want, be it 60 be it seconds or hourly.
Each new candle and bar chart shows what’s happening at that moment. Naked traders combine live trading action with historical action and make informed decisions accordingly.
Naked forex traders combine live price action with other metrics, especially volume and order flow data.
One would need to be on the lookout if higher prices are accompanied by fewer entrants. If this is the case, the naked trader should be quick to conclude that the party might be over. When prices rise and fewer buyers are interested, it’s a sign for early buyers to potentially look to become sellers.
The same holds true on the other side of the trade. A falling currency that suddenly sees heightened volume could be a sign of a rebound.
Other important skills for naked forex traders
Another forex trading technique that naked traders could consider using is support and resistance. It‘s easier to see support and resistance levels on a chart without the clutter of moving averages, trend lines and various indicators.
By using support and resistance, traders analyse price swings, identifying higher highs, higher lows, lower highs and lower lows. They help to define the current price action’s scenario:
Uptrend – a series of higher highs and higher lows, which build an upward price direction.
Downtrend – a series of lower highs and lower lows, which built a downward price direction.
Consolidation – a lack of any specific pattern
Therefore, naked traders may not use specific indicators to make a simple chart analysis. In a bullish trend you will see a series of higher highs and lows, which could become a signal to buy. In a bearish trend, you’ll see a row of lower highs and lower lows, which could be a signal to sell.
Naked forex traders can also take advantage of live order book flows, a collection of prices where all interested buyers are placing their bids and potential sellers are placing their prices. Armed with this information that evolves in real-time, a naked forex trader will adjust their strategy according to their own internal support and resistance levels.
Order flow analysis can help forecast where order imbalance will take place. Trading order flow means spotting the points at which the market dropped or rallied significantly. This can be done with the naked eye. For example:
Frequently asked questions
There is no right or wrong strategy for trading forex or any other instrument. You might consider these questions and others. Does naked trading attract people with no understanding of technical trading? Does a naked trading strategy make perfect sense? Is it advantageous to read and understand the market without relying on a particular indicator?
Traders that respect their strategy and implement stringent risk management guidelines can be typically more likely to succeed over the long-term than reckless traders. Much can depend on an individual’s ability to remain disciplined and focused. Naked trading carries similar risks as using other trading strategies.
New traders want to know if professionals, such as those trading for a hedge fund, trade naked. The answer is that some do. Trading for a hedge fund and other major institutions is usually performance-based. A trader is free to apply any trading strategy so long as it generates results.
The easiest way to practice a naked trading strategy is to find a reputable broker that offers customers a demo account. A demo account looks and feels just like a real-live trading account although the user is not trading with real money.
No. Chances are you are confusing the term naked trading with naked short selling. Naked short selling consists of a trader shorting (i.e borrowing) any tradable asset without technically borrowing it in the first place.