Naked trading is trading based on price action
without indicators. On forex forums you will encounter senior traders who
successfully trade full-time using price action alone. They, like me, have probably
investigated hundreds of indicators in depth, spent thousands of hours
screen-time, invested hundreds of dollars on software and training and blown a
couple of small live accounts, before learning that all you need to be
consistently profitable, can be derived from price action alone. This series of
weekly articles will show you one way in which you too can trade naked
profitably.



 My top 10 basic principles are simple and effective



1.  Monitor
the mood of the market (economic/political fundamentals & stock market   indices)



2.   Keep
an eye on the calendar (for high impact news releases)



3.  Use
higher and lower timeframes (Fractal Theory of markets)



4.   Determine
the trend and momentum



5.   Find
support and resistance levels



6.    Enter
on a retracement



7.    Manually
trail your stop loss to successive higher lows (if long) or lower highs (if
short)



8.    Exit
at support or resistance or when your trailed stop loss is triggered



9.     Maintain
good money management



10.   Improve
your edge with Dukascopy’s comprehensive toolkit

A.     Surf
with a bikini: minimalist indicators if, at first, you are too shy to go naked



B.      How
I didn’t follow my own top 10 principles and paid the price



This first article will give you 70% of what
you need but the other 30%, which I will describe in future articles, are
critical to consistent success. If you want to be sure you don’t miss out, click
on the link to “follow me”.



Why not Indicators?



Indicators can be
helpful and there is no reason why you shouldn’t use them. However, what they
all do is apply a mathematical or statistical formula to past price action
and display the result on a chart. Many of them say similar things in different
ways. Duplicate or conflicting information clutters your chart and can cause
distraction or confusion. Consider the following eight popular indicators.
Imagine if you had all of them plotted on your chart. Pick any point in time.
Would you buy or sell? Not so easy, is it? (Fortunately, Dukascopy converts
them all into an easily accessible aggregate - more about Dukascopy’s Toolkit
in a future article).



Eight Popular
Indicators



Retrieved from  http://www.dukascopy.com/video/pdf/2012/06/01/DI.pdf on 2012-06-03



The most
important information you need to trade naked profitably can be distilled to
the essentials of:

  • Trend
  • Momentum
  • Support and Resistance







You don’t
need indicators to tell you this. With the information in this series of
articles and a reasonable investment in screen time you can learn to see this
quickly, clearly and accurately from price action alone, on a naked chart.



 The Fallacy of
Predictability



Many traders new to forex assume
that if they can only find the right combination of indicators, with the right
parameters (settings), they will be able to predict the market. You cannot.
No-one can. You cannot drive a car by looking only in the rear view mirror. The
market is unpredictable. The Citigroup Surprise Index shows how often even
economists with the best education, information, powerful computers and sophisticated
econometric models get it wrong when predicting news releases with a high
impact on the forex market.



 The Citigroup Economic Surprise Index



Retrieved from
http://www.bloomberg.com/quote/CESIUSD:IND
on 27 May 2012



 But don’t despair. All the
information in the market is reflected in the price. Forex is a highly liquid
and efficient market with a daily volume of three to four trillion US dollars.
As a proxy for the “price” of countries you can quickly scan the stock market
indices for countries and regions. I will talk more about how to do this in a
future article.



 If you can’t predict use
probabilities. You don’t need to know which way the market will move if you
stack the odds in your favor (“trade with the trend&rdquo and maintain good money
management (more in a later article).



 Determining the Trend



You increase the probability of success if you “trade
with the trend”. You can determine the trend by looking for lower highs (LH) and
lower lows (LL) for a down trend (Bear) as marked on the two charts below.
Similarly, look for higher highs (HH) and higher lows (HL) for an uptrend (Bull).



Momentum



Not only do you want to know whether the market
is going up, down or sideways, it helps to know how fast it is going up or
down. If price is moving fast it is more likely to continue, at least for a
little while, in the same direction. It has to slow down before it changes
direction, which warns you of a possible reversal. You can tell the momentum,
without an indicator, by the slope of the price line or the length of the
bodies of candles. The steeper the slope and longer the candle body the faster
price is moving. Conversely, if the slope is getting shallower and candle
bodies shorter then price is slowing down.



Minimize Loss Maximize Profit (Manually trail your Stop Loss)



The market often moves in ways we
don’t expect. Sometime the moves are big. It can move in the direction of your
trade or against it. This can have a big positive or negative impact on the
balance of your account. This is what
the former options, derivatives, arbitrage and
currency trader Nassim Taleb calls a Black Swan (“The Black Swan”. 2007. Random
House,  New York).
Forbes Magazine listed him among the "Most Influential Management
Gurus". The Nobel Laureate Daniel
Kahneman proposed the inclusion of Taleb's name among the world's
top intellectuals, saying "Taleb has changed the way many people think
about uncertainty, particularly in the financial markets. (Retrieved from
http://en.wikipedia.org/wiki/Nassim_Nicholas_Taleb
on 27
May 2012
).  “The main idea
in Taleb's book is to not attempt to predict Black Swan events, but to build
robustness against negative ones that occur and be able to exploit positive
ones”. (Retrieved from 
http://en.wikipedia.org/wiki/Black_swan_theory
on 27
May 2012
). Read on to find out how to do that.



 Many traders use a Stop Loss (SL) of a
fixed number of pips, which their experience (or someone else) has shown works
with a particular currency pair and the timeframe they trade. Others may use a
multiple of Average True Range (ATR) to set their stop because it is more
responsive to the market. Both of these protect against negative Black Swans.
To take advantage of positive Black Swans they may set a Trailing Stop to
follow a defined number of pips behind the price. All these methods do work,
but with limitations. The market, however,  often acts unexpectedly outside its usual
ranges. When it does it will trigger these stops.



 Similarly, you may set a Take Profit (TP)
order at your predetermined Reward:Risk (RR) ratio. If, for example, it is 2:1
then for a SL of say 30 pips your TP will be 60 pips. But the market may not
reach your TP before reversing or it may go way beyond.



You can do what Nassim Taleb recommends more
effectively by manually trailing your SL. Let’s look at an actual trade taken
from the May Trader Competition



(see http://www.dukascopy.com/tradercontest/?action=blog&trader=nsteve&month=201205).



I entered EUR/USD short when price broke below a
head and shoulder pattern. My SL (1) was set just above the previous high and
the TP just before a support level. When price moved below the next Lower Low (LL)
that was a Trigger (1) to move my SL to the next Lower High (LH) at SL2.
Similarly, at Trigger2 I moved to SL3. The next time price went below the
previous LL, I waited because momentum slowed. Had I moved my SL at that point
I would still have been safe, but I would have been stopped out before SL4. As
it happened, I waited until Trigger3 and moved to SL4. At Trigger 4 I moved to
SL5 to protect my profit, even though price was getting close to my TP. Finally
my TP was triggered. However, if I had encountered a Black Swan anywhere along
the way, and price reversed direction, I would not only have been protected,
but I would also have maximized my profit. On the other hand, if there had not
been a nearby support level, I could have continued to surf down the trend from
one LH to the next, until the trend ended and I was stopped out. This exposes
me to the huge profit available from a positive Black Swan.  Instead of a fixed R:R ratio my risk rapidly
reduces and my reward expands to the maximum the market offers. All without
indicators.



You too can trade naked profitably! 

(watch the webinar on this topic)

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