Naked Forex trading ‒ which is also referred to as price action trading ‒ is a style of trading not often brought up in contemporary trading conversations. It involves buying and selling currencies without using trading indicators.
Sounds risky; no? What is the appeal and the benefits of this style of trading? How does it work, or does it actually work? How would you go about implementing a price action trading strategy?
In this article, we will cover the full monty on naked trading, and give you tips on how to try it out ‒ hopefully without losing your shirt.
Naked Forex Trading Outline:
- What is Naked Forex Trading?
- How Do You Trade Price Action?
- What Is A Price Action Trading Strategy?
- Understanding the Forex Market Cycle
- How To Read A Price Action Chart
- Pros And Cons Of Trading Naked
- Risk Management for Naked Forex Trading
- Should You Try Naked Forex Trading As a Beginner Trader?
What is Naked Forex Trading?
Naked Forex trading, otherwise known as price action trading, is when you base your trading decisions on current price movements and not on past or future price movements and market conditions. When you are practicing naked trading you use price action charts to guide your decisions as they help you see what the market is currently doing and where it might going. It is a simplified way to trade where you make trading decisions immediately and quickly, Without the use of technical indicators attached to your charts.
What Does Price Action Mean in Trading?
Many short-term traders base all of their trading decisions on price action and the patterns and trends that can be drawn from them. What is price action? Simply put, it is the movement of the price of an asset charted over time.
How Do You Trade Price Action?
Trading with a price action strategy, as mentioned before, is based on making subjective trading decisions after reading the market’s price changes. At its simplest form this naked trading technique does not use any indicators or fundamental analysis. However, you can use some technical analysis as well if you prefer.
How Do You Trade Without Indicators
When you trade with indicators you need to analyze a lot of detailed data and patterns. This may take longer and hold you back from taking action at the right moment. If you’re a beginner in trading, you may find all this analysis and technology overwhelming to grasp and prefer the simpler method of naked forex trading.
To trade without indicators, all you have to do is identify patterns in the price charts and use those patterns to predict where the market might go next. To do that you need to learn how to read price charts and analyze candlestick patterns. You also need to have knowledge of the market, market cycles, understand how it works, and understand market trends and patterns. So, let’s recap…
To trade without indicators you need to:
- Gain knowledge of the forex market.
- Understand how the forex market works.
- Understand the forex market cycles.
- Sharpen your sense of market trends and patterns.
- Learn to read price charts.
- Learn to analyze candlestick patterns.
- Use all this knowledge to predict where the market might go next.
What Is A Price Action Trading Strategy?
What is a price action strategy, and is there only one? No. There are several price action strategies that you can adopt, strategies that do not require the use of indicators or fundamental analysis. Here are a few:
This strategy is also known as a ‘pin bar’ strategy. The candlestick pattern (or pin bar pattern) looks like a candle with a long wick. The pin bar shows the rejection or reversal of a specific price and the wick shows the range in price that traders rejected. When you apply this strategy you base your decision on the assumption that the price will move in the opposite direction of the wick. This is where investors then decide to choose a long or short position depending on which one they believe will yield profits.
Inside Bar Strategy
An inside bar strategy is a two-bar price action trading approach where the outer bar is more important than the inner bar and the inner bar is smaller and falls within the high to low range of the previous bar. This means that the inside bar’s high and low are greater than those of the prior bar. The inside bar therefore indicates a period of consolidation or price volatility. What do you do then? It is advised that you place a stop-loss order just a bit more than the top or bottom of the inside bar depending on which direction the break is predicted to go.
Head and Shoulders Reversal Trade
A head and shoulders pattern, which is a bearish reversal pattern, looks like a head with two shoulders on either side. It indicates that the uptrend has peaked and that the reversal ‒ from bearish to bullish ‒ has begun. This is when the succession of higher highs ‒ the first and second peaks ‒ is broken by the third peak, which is lower than the second. The head and shoulders reversal trade pattern is regarded by traders as one of the most dependable patterns for trend reversals, indicating that a downward trend is almost over.
Trend trading is great for beginner traders as you only have to follow the trend of the price. There are different ways you can track market price trends, and you can follow and learn from more seasoned traders. A good way to start trend trading is to choose a short position while the market is bearish (downtrend), and when the market is bullish (uptrend) opt for an extended position.
Trend Following a Retracement Entry
This naked forex trading strategy is when investors look at short-selling after following an existing bearish trend with lower highs showing up consistently. If market prices start to rise, with highs and lows trending up, then investors will consider buying in.
Trend After a Breakout Entry
In a breakout price action forex trading strategy, a trader will study the charts and signals to see if a price has moved outside the resistance line. If the breakout happens above the resistance line the trader will opt for a long position. If a price moves below the support level, then the trader will choose a short position, or look to sell. When a price moves beyond its barrier there is an increase in volatility and prices are more likely to move in the breakout’s direction.
The Sequence of Highs and Lows
Trading naked is basically about following highs and lows to find emerging trends in market prices. If the price of a currency is being traded at a higher high and higher low, it indicates a bullish trend. If the currency is being traded at lower highs and low lows, then it’s a down trend, or bearish. To take advantage of this strategy choose an entry point at the lower part of a bullish trend and then set a stop-loss order right before the higher low.
Understanding the Forex Market Cycle
Understanding the forex market cycle is an integral part of your price action trading plan if you wish to trade without indicators. So let’s dig in. What do you need to know about market cycles?
There are various market cycles, some go for long periods of time and others are more fast-paced. But let’s stick to the basics today. A typical market cycle pattern goes like this:
- Ranging lows
- Trending upwards (bullish)
- Ranging highs
- Trending downwards (bearish)
Gaining a good understanding of market cycles will help you when you’re naked forex trading without indicators, so you can judge whether it’s a good idea to make a trade or not. For better chances at succeeding, trade in the direction of the trends and not in the opposite direction.
How To Read A Price Action Chart
When trading Forex, there’s a lot to keep track of. You have to be aware of the daily trading range, the market sentiment, and whether or not you want to be in a long position or short position.
And then there are the price action charts.
Price action charts can be difficult to read at first glance. This is especially true if you’re new to forex trading. But they’re actually pretty simple once you get the hang of it. These charts break down the price movements over time into easy-to-read bars. This allow traders to see how the market has been moving and what kind of trends have been taking place.
The most important thing to remember when naked forex trading and reading a price action chart, is to focus on the present price position and movement. Based on the cycle, you must determine where the price will go so you can decide how you will trade.
Pros And Cons Of Trading Naked
Like all things in life, inevitably there are a few pros and cons to price action trading you need to keep in mind when deciding to take this approach.
Pros to Naked Forex Trading:
- It has more advantageous exits and entries compared to indicator trading.
- You spend less time on research.
- Price action trading can be tested on simulators.
- You can use the strategy of your choice.
Cons to Naked Forex Trading:
- Your trades cannot be automated.
- Entails more focus and effort than conventional trading approaches.
- Each trader will interpret the signs in their own way.
- Indicators typically follow after prices.
Risk Management For Naked Forex Trading
There are common risks to forex trading whichever approach you decide to take.
- Transaction risk
- Interest rate risk
- Leverage risk
- Counterparty risk
- Country risk
In price action trading, the biggest disadvantage that could put you at risk is not having enough understanding of the industry in order to trade naked. Price action trading is done in real time. This means you need to have a good understanding of the forex market, how a currency pair may move, and where it is in the market cycle. With the right knowledge, understanding, and basic tools, you can be well on your way to trading naked successfully.
Should You Try Naked Forex Trading As a Beginner Trader?
Expert traders actually recommend that if you are a beginner in trading it is a good idea to start naked forex trading before you get into using indicators. Why? Well, since price action trading is based on the current market and not on past or future market movements, as a beginner you get to practice watching and predicting which way the market will move.
Sharpening your trading instinct is part of becoming a good trader, and using the various strategies listed above, you can learn the basics of trading before you apply analysis and indicators to your trading tool kit.
Are you ready to give it a try? You can open an account with us at TIOmarkets with as little as $50. Want to test the waters first before putting real money into it? You could try naked trading on a risk-free demo account.
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