Practical Naked Trading Tips

June 01, 2017 09:18

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Dear traders,

I am often confronted by other traders with such questions as:

  1. Which indicator is the best?
  2. Which suite of indicators offers the clearest edge in the markets?
  3. Perhaps it's best to find out who's making money trading Forex and follow their example.
  4. What's the magic formula?

Unfortunately, the answers to these questions depend on who you ask. As we will see later in the article, trading is often relative, and rarely, if ever, a one-size-fits-all solution applies. Some indicators are not relevant or accurate, others are misinterpreted by many, and some, best used contrary to their original design intent.

Indicators can also be incorrect. What if the indicator is correct, but a bit slow to hint at the direction the market will be moving in? The indicator might provide valuable information, but also lack market responsiveness, thus losing value.


Naked Trading in Forex

Forex newbies usually focus on indicators. This is completely understandable, since the vast majority of Forex trading books, websites, and trading seminars focus on indicators and indicator-based trading. Indicators encourage "secondary thinking", which prevents traders from acquiring expertise in the trading markets.

Secondary thinking involves analysing the indicator and considering where the indicator may go rather than focusing on the market. Naked traders, by definition, focus on the market then and there, which is very different.

Tip 1: Historical vs. Now Moment Price Action

The big moves of the US Dollar versus other currencies have made Forex trading more popular than ever, but the influx of new traders could possibly be matched by an outflow of existing traders. That makes one of the greatest advantages of Forex trading stronger than ever. It is that the price tends to repeat itself. Simply put, if the price rejected at some point in the past, it tends to reject again some time in the present.

Aligning historical and now-moment buyers or sellers is of extreme importance and the only way to do it is to study the price deeply. The price behaves the way it does as a result of the behavioural patterns and decisions of the traders – both human and algorithmic (algos) – participating in the market at any given time.

Tip 2: Price Reverses before the Indicator

Price action traders have a big advantage. Why? Entering a trade early often means the entry price is closer to the stop loss price. A tighter stop loss may mean more profits. As a rule, significant moves in the Forex market occur before a technical indicator provides a signal. Want proof? Sign up for llive trading webinars and see my trading in action!

Tip 3: Use the Fibonacci Expansion Tool

Source: Chart from Admiral Markets MT4 SE, April/May 2017, 00:00 - 12:00 Point A - 00:00 Point B -12:00 Point C -12:00 April 17 - May 10

One of the greatest things I love about the Forex market is its simplicity. By using native MetaTrader 4 tools, we should be able to calculate potential support and resistance levels. The Fibonacci expansion (extension) default levels might not be enough. Try adding these:

  1. 61.8% (0.618): Interim support and resistance. Usually, the first rejection off the 0.618 is successful, especially, if there are historical buyers or sellers around the same level.
  1. 100% (1.0): If the price breaks and re-tests at 0.618, this level should provide support or resistance, depending on the price movement.
  2. 123.6% (1.236): Similar level to 0.618. Look for a confluence of historical buyers or sellers around this level.
  3. 138.2% (1.382): This is the strong level. Look for candlestick reversal patternsaround this level.
  4. 161.8% (161.8)-200% (2.0): Key support and resistance. The price is likely to reverse from here.

Tip 4: Look for Higher Timeframes

The common rule of thumb between time frames is a ratio of 4. For example, if you want to trade using a 60-minute chart, the next time frame down to use for entries would be a 15-minute chart (60 divided by 4). Looking for the next time frame up, use the same ratio. Very often, a trader would go up to the 240-minute chart from the 60-minute one. A great tool to use is Admiral Mini Chart – a part of MetaTrader 4 Supreme Edition. It overlays any time frame you choose on the existing chart with another time frame of choice.

Tip 5: Follow the Intermarket Correlation

Forex is connected to other markets, especially stock markets, indices (equities), and commodities. Let's take the AUD and the JPY as an example. Basically, when we're talking about a risk-on environment, commodity trading prices tend to increase, and traders go long AUD due to the factor. When commodity prices go up, stock markets also go up, creating demand for positive swaps on AUD pairs as opposed to JPY.

When it's a risk-off environment, usually the opposite occurs, and, as a result, the JPY appreciates as foreign flows from Japan are repatriated back to the local currency. The AUD has a high correlation to gold due to Australia's extensive gold mining operations. As gold prices fluctuate, this increases or decreases the amount of funds transferred into AUD to make purchases of the metal.

These transfers essentially change currency demand and can bring about the swing in the AUD/USD currency pair as well.

One of the most essential tools I use is Admiral Correlation Matrix. It does a great job in terms of intermarket correlation!

In the end, the high volatility trading concept that I have personally developed and created might be a good entry to naked trading as it's pretty simple and straightforward.

If you have any questions, feel free to comment in the section below. Happy pippin'! :)

Cheers and safe trading,

Nenad