Trading is all about reading the market and making the right calls. Back in the day traders and brokers were left with technical analysis to guide them through the murky waters of stock exchanges.
These days everyone has a smartphone in their pocket, and retail trading has gone through the roof.
More importantly, digital technologies brought us a whole array of indicators and other tools we can use to predict market patterns. But what if you used nothing at all? Today we’re talking about naked chart trading and how to do it right.
What Exactly Is Naked Chart Trading?
There are many types of trading out there. You’ve got people investing in long-term positions, those who enjoy the thrill of day trading, and those who are somewhere in between. No matter which group you belong to, there’s a good chance you’re using a number of indicators to gauge different market trends. Indicators are great tools that can show you patterns and allow you to “see what’s around the corner”. That being said, indicators can be a double-edged sword. As much as they are helpful, indicators can be distracting.
Filling your graph with five indicators puts you at risk of confusion. It’s easy to get overwhelmed by the information you’re getting from several indicators, especially when said indicators don’t always align. Naked chart trading removes this potentially devastating clutter by eliminating indicators altogether. The idea behind naked trading is to anticipate future trends based solely on price action analysis. Right now you’re probably wondering if that’s even possible. Here’s how it works.
The fundamental requirement for positive naked chart trading is to figure out the long term trend of a particular chart. You want to check the monthly chart and see whether the graph is ascending, descending, or sidestepping. This initial analysis will tell you whether it’s safe to open a position in this stock, whether it’s in a downward trend, or if it’s experiencing a period of uncertainty.
Reading the Candles
Once you’ve determined that a particular stock, commodity, or something else is worth investing in, it’s time to start analyzing the price action by looking at candles. If you take a look at a particular part of a monthly chart where the graph hits a resistance, you’ll notice that the candle has a very short body, but usually a rather long wick. This is what you call a trend reversal indicator. You’ll find such candles in both up and downtrends. In other words, a downward trend will usually end with an inverse candle that also has a very long wick.
How to Utilize Trend Reversal Indicators?
Reading trend reversal indicators puts you in a good trading position. You can decide to short the market or long it depending on your particular chart. If you’ve done market trend analysis as well, you’ll have a more complete picture. It’s a good idea to use the very top of the candlestick in the upward trend to put your short stop loss.
You can use this method to open long term positions as well since price action analysis usually offers a good enough insight into the future trends of a particular chart. Naturally, there are no guarantees but the same goes for indicators as well.
Benefits of Naked Chart Trading
Working with a clean, clutter-free chart is great, but that’s not the only benefit of naked chart trading. Many stock market traders prefer using a naked chart because it represents the real-time view of the market. With indicators, no matter how good they are, you’re always working with some delay. This also applies to many custom indicators that are often considered to be optimized.
Finding the Middle Ground
All this being said, indicators have their place as well. After all, there’s a reason why so many traders are largely dependent on using indicators to negotiate positions in just about every market out there.
The fact that naked chart trading works don’t mean that you should completely forgo using indicators. You should develop your own trading style. If that means using a combination of naked chart trading and indicators, so be it.
One thing to remember about naked chart trading is that you’ll become better with time. It’s essentially a skill that you need to keep working on in order to become good at it. Many people have a hard time letting go of indicators and trusting their own gut. That being said, naked chart trading is a great way of boosting your own intuition and learning how to recognize some of the more obvious market trends as they happen in real-time.