Trading naked or with technical indicators
Do you know someone who trades naked? Great! Hope they're good looking ;-) All joking aside, this article is about another form of naked trading: trading without technical indicators. In technical analysis, it is possible to make key decisions using what is known as a "bare" chart, but is this right for you?
Take a look at the below chart:
And now, compare it with this one:
Do you see the difference? The second chart is "indicator-free" - in other words, no indicators are used to analyse price action.
There are typically no moving averages, no RSI or volume indicators or any other additional information that we would normally use for a technical analysis.
What you see in the second illustration is what we call a naked chart.
Trading with naked charts can be used in any market that has charts (ETFs, stocks, forex, etc.).
Naked charts are used to have a simplified and clearer view of what is happening in the market. When a chart is stripped down, traders can escape information overload and focus on what really matters: the price.
Naked traders vs. technical traders: what separates them?
Naked traders focus on Japanese candlesticks that tell them what's going on in real time. They are only interested in price action signals.
Technical traders, however, mainly rely on technical analysis tools to read information off a chart. Through their use of indicators, they then determine if a certain trade is a good opportunity.
How do I use naked charts?
Naked charts help traders capture momentum and understand what's going on with the price at a specific point in time. So traders should first understand the general direction of the market using highs and lows to identify the various trends:
- Bullish trends
- Bearish trends
- Emerging trends
- Ranges or price tunnels between highs and lows
Support/resistance traders often rely on price fluctuations according to Charles Henry Dow's theory, which identifies four different types: higher highs, lower highs, lower lows, and higher lows. This allows them to determine which of the following scenarios is currently occurring:
- A bullish trend - a series of higher highs followed by higher lows
- A bearish trend - a series of lower lows followed by lower highs
- Consolidation - the absence of a specific trend
To see how the market is moving, we can do a basic chart analysis without any indicators. This makes it easy to determine if a market is trending. Also, when we see an uptrend with a continuation of higher highs and higher lows, we know this is a buy signal. Bearish trends, on the other hand, feature a series of lower lows and lower highs, signaling a sell.
When a price gets stuck between two levels, the highs and lows stay at the same levels. Without clear limits, traders may find it hard to understand price action. That's why neutral markets demand special attention and greater caution.
Traders who use trend reversal strategies often use horizontal levels, trendlines, pivot points and Fibonacci levels. Support and resistance levels are considered to be great for identifying key trend reversal points:
- When the price continues to move along major support levels which then turn around.
- When the price retreats along with the previous support level, making it the new resistance level.
Support and resistance levels are important areas in naked charts as they are where we are likely to identify price reversals.
We can identify both buy and sell signals in naked charts by determining the Japanese candlestick reversal pattern. The most common sell signal is a rejection candlestick such as a Pin Bar.
Do timeframes impact trading on naked charts?
Instead of using a daily chart, traders can switch to shorter time frames to get a closer look at what's going on. Some traders use multiple time frames to make a better decision. To generate a better approach, you can ask yourself a question such as:
Does a more bullish trend indicate a greater probability of resistance failure?
After a breakout, trades pile up, and one can wonder if the currency pair - or any other tradeable asset for that matter - is overbought or oversold. Actually, this question isn't important when reading naked charts, as it allows traders to rely on the resistance that is above the current price run.
Can we get exit signals when trading with naked charts?
Support and resistance levels don't tell us if pricing will continue its trend, but traders should remain vigilant once prices reach these levels. You have to be careful of what the price is doing. This is important because you can see from the price action what it is about to do.
Being vigilant and practicing the identification of chart configurations and patterns can help you find an exit point to secure your profits.
Benefits and drawbacks of the various chart types
| Regular charts | Charts without indicators | ||
|---|---|---|---|
| Benefits | Drawbacks | Benefits | Drawbacks |
| The right indicators provide a clear signal | Indicators make traders too dependent on outside help | Naked charts help traders practice their market reading skills | New traders may find it very difficult to understand price signals without the use of indicators |
| Indicators are non-subjective and have no emotions | Indicators tend to lag and are prone to bugs | Some traders prefer to use naked, clean charts because they aren't filled with tons of information | Traders may feel lost when looking at a naked chart |
| Indicators help traders focus on key areas of a chart | Indicators give charts a messy and confusing appearance | Learning to understand a chart without any indicators can take time | |
| They save time | Improper use and combination of indicators can lead to poor trading results | ||
Fuzzy logic: how it works in trading
Traders are basically people who are inclined to make subjective assessments. We often clutter our decision making process with things such as intuition and the emotions that prevent clear thinking. Unfortunately, technical analysis doesn't support fuzzy structures, so some traders need a definite yes or no to interpret signals and have a clear view of the next step.
The "black or white" approach helps alleviate many of the difficulties encountered in trading. This means that, as a trader, you need to learn how to handle signals whose interpretation may vary.
No indicator is 100% accurate, but we all know that, say, an RSI below 30 is a sell and above 70 is a buy. A lot of false signals happen if we blindly follow this basic logic. However, by combining other market information, we may decide to open smaller or larger positions.
Our brain is used to fuzzy thinking, we know how hard we need to push down on an accelerator or brake, and accidents do happen. Similarly, it takes a long time to master and protect a trading portfolio.
Conclusion: naked graphiques or technical analysis?
Traders who know how to interpret naked charts have a huge edge, as they can understand what is going on in the market without having to rely on a bunch of indicators.
With the rise of automated trading (Expert-Advisors), it seems that there is increased demand for ready-made solutions, and learning to read charts tends to be a factor that causes many people to give up prematurely.
However, we need to understand that the basics of chart reading are also the key components of knowledge that every trader should have, no matter what market or strategy he or she chooses.
In the end, whether you decide to use specific indicators or trade without technical indicators, make sure you know everything about your preferred trading style to eliminate errors, prevent losses and make good decisions, because this will inevitably determine your success, regardless of what approach you use.
