There is a phenomenon commonly known as naked trading; it means making trading decisions from an unflustered chart. It means the absence of any kind of indicator or analysis tool. Here a trader is only watching what price is doing; watching candlestick formations, and deciding the trend from price activity on the charts.

In this type of situation, an accumulation of bullish candles means the market is going up (Bullish market) while several bearish candles represent a downward price action (bearish market).

On the other side of the fence is the ”Indicator-trader”; a trader who trades the market uses indicators as a guide. Most of these traders have very colorful and elaborately designed charts; the idea is that when several indicators support a trading decision it increases the likelihood of success.

With trading using naked charts, indicators are distractions; because of the bias they bring into a trading environment. With naked trading, a trader is watching price action, taking note of resistance and support,

drawing trend lines to catch reversals and trends.

The unique thing about this approach is that it makes a trader very objective. The entire trading chart is open to interpretation based on price action.
Here, one has to have a good grasp of the various candlestick formations to spot possible changes in price behavior.

From various charting tools like trend lines to trend lines to doji formations, a trader is equipped to navigate through the fluctuations that make up the forex market.

When indicators are applied to a chart, they evaluate the data from the candles, ticks or bars; and this information is represented in such a way that a trader can look at the chart and easily have an idea of what direction the market is moving in.

The disadvantage of this application is that most indicators have upper and lower limits, based on the fact that price cannot move in one direction infinitely. This leads us to over-bought and over-sold regions. Most indicators would give an over-bought warning when market price goes above a recent high level, and the general interpretation is that it is best to sell in over-bought levels. This is not always true and can be very costly.

When there is a strong market trend, price will make higher highs and lower lows, and depending on prevailing market conditions; a trend can last for several days. In such a case, a trader using the RSI indicator for example would be very hesitant to take long positions. Instead of taking long positions, the trader would be waiting for a change in the market direction.

This bias can severely limit a trader’s ability to maximize profits in a strong trending market. The school of thought that believes one should buy in over-bought regions and sell in over-sold regions is not so far from the mark. This is because these regions are usually areas where market price breaks out from, and price making a new high or new low has a very strong significance.

This article is not to attack the use of indicators. Indicators can be very helpful when a trader is in doubt, but they should be used minimally. Indicators should not take over the entire process of reading price activity, simply because they are made to have limits, and we trade in markets that are constantly evolving. It is necessary to have an open mind while navigating the forex markets, and take decisions based on actual market behavior or price action.

Sayings like " the trend is your friend", "never bet against the trend" are popular for a reason, more money is made in the markets by following the prevailing trend. It is always better to keep things simple. Study price action, throw in one or two indicators if you must, but never deviate from the goal at hand; to determine the trend and trade accordingly.
Translate to English Show original