Trading Naked Charts & Price Zones

Trading naked means trading clean charts without applying any technical indicator. A clean chart can prove helpful, however, it requires a precise calculation of price zones. These zones are general areas of support and resistance where the price is expected to consolidate, or even reverse.

The following article presents information and tips on how to trade naked charts and it is partially based on the book “Naked Forex High-Probability Techniques for Trading without Indicators” by Alex Nekritin and Walter Peters. The charting is made by the author.

 

The Advantages of Trading with Naked Charts

 

The key to trading naked charts is drawing support and resistance levels correctly. Combining these levels you will come up with two crucial price zones (S&R). These price zones form two boxes on the chart (as it will be explained later) and can help traders easily recognize:

  • The general direction of the market (higher highs/lows)
  • Strong trends (bullish/bearish)
  • Consolidating markets (ranging between the support and resistance boxes)
  • Breakouts (when the price manages to break out of support or resistance zones)
  • False breakouts (when the market retraces back)

The clean-chart approach is commonly followed by currency traders, however, it can be followed by any other trader as well.

 

Price Zones -The Quest for the Sweet Spot on the Chart

 

By examining historical charts in different markets, we may conclude that there are certain historical price levels where the price tends to repeatedly reverse. These levels are critical to all traders and especially for those who trade ‘naked’.

Combining support and resistance on the chart leads to the formation of some crucial price zones. Once a price zone is identified on a chart, the wise trader recognizes a potential trade opportunity. If the price has repeatedly turned around certain price levels in the past, then these levels will probably prove significant in the future too.

In the following example, the price zones of Bitcoin versus the US dollar using the daily chart.

 

Chart: Bitcoin versus the US dollar (daily)

Bitcoin versus the US dollar (daily)

Key Characteristics of a Price Zone

These are some key features:

  1. Price zones form areas of significance, not price points
  2. Price trends tend to reverse near key zones
  3. Price zones are getting better with age
  4. Price zones rarely need to be modified

 

Identifying a price zone is important, but not enough

Support and resistance levels form a sweet spot on the chart and create zones of trading significance. However, identifying a price zone is not enough to trade successfully. The naked trader will not accept a trade based solely on the fact that the price reached a significant price zone. The naked trader will need several confirmations to decide if and when to take a trade. On the other hand, the naked trader will only accept a trade if the price has reached a price zone. Meaning that the confirmation of a price zone is the first step to create a setup. These are some basic facts:

  • The identification of a price zone creates a trade setup
  • The naked trader will only accept a trade if the price has reached a price zone
  • If the price is reaching a price zone, the naked trader stays on alert
  • The naked trader will need several confirmations to take the trade

 

How to Create the Zones of Significance

 

In many cases, the identification of support and resistance is obvious and easy to draw on the chart. Nevertheless, in some other cases, it may be complex and confusing. These are some shortcuts to recognize price zones on the chart:

(1) Prefer to use a line chart

The closing prices matter the most. Line charts are only showing closing prices and that makes things easier.

(2) Begin your research on the higher timeframes

Any pattern identified on a high timeframe (monthly, weekly, or daily) is considered significant. Price zones are not an exemption to that rule. Lower timeframes are useful for adjusting the price boundaries, as seen in the following US Dollar index chart.

(3) The Significance of the Number of Touches on a High Timeframe

Many touches on a low timeframe can be equivalent to only a few touches on a higher timeframe. The significance of a zone is related to the number of touches on the boundaries. Therefore, a zone with 4-5 touches over the past year on the daily chart can be seen as a critical zone.

(4) Focus on volume peaks near highs/lows

Volume is the second most important data, after price. If volume peaks at certain price levels, this means that these levels activate demand or supply coming from large market participants. Note that not every naked trader focuses on volume.

(5) Check the price action exactly at the middle of a range

In some cases, the middle line of an important price range can also work as support or resistance. That can be seen as an extra clue confirming the precision of the range. 

 

In the following example:

(a) drawing support and resistance on the weekly chart, and then,

(b) using the daily chart to adjust the price range.

 

Chart: The US Dollar Index Price Zone (Weekly & Daily)

The US Dollar Index Price Zone (Weekly & Daily)

 

Tips for Recognizing an Important Price Zone

As mentioned above, the identification of the crucial zone on the chart can be sometimes an easy task, and sometimes not. These are some tips for avoiding mistakes. 

  1. Avoid drawing more than a couple of zones, and preferably draw only one.
  2. The goal is to create general zones of support and resistance, not particular prices of S&R. There can be many touches near a price zone that are not perfect. Some touches may come within the zone and some others out of the zone.
  3. Be aware of false breakouts. The price can extend beyond a critical zone and then retrace. You need at least 3-4 closings above or below the zone to confirm any breakout. Below you will find more information regarding false breakouts.
  4. Volume can prove helpful in confirming strong price zones and potential breakouts. Volume should increase as the price gets closer to a critical zone. Moreover, a breakout with weak volume figures is most probably a fake breakout.

 

 

Identifying the Market Mode (Trending vs Consolidating)

 

Financial markets are moving in two modes, either they are following a trend or they are consolidating. What most traders are missing is that financial markets are consolidating 80-90% of all time.

(1) Choppy directionless markets (80-90% of all time)

(2) Powerful trending markets (10-20% of all time)

Financial markets constantly move between these two modes. Firstly, they consolidate for a period and then move in one direction, to later consolidate again. Maybe, the best way to understand this 2-mode approach is to study the Wyckoff patterns.

 

The Wyckoff Phases

According to Wyckoff, there is a repeating market cycle consisting of four phases:

  1. Accumulation Phase (consolidating)
  2. Uptrend Phase (trending)
  3. Downtrend (trending)
  4. Distribution Phase (consolidating)

 

Chart: The Wyckoff Accumulation

Wyckoff’s Accumulation Schematics

Chart: The Wyckoff Distribution

 

Wyckoff’s Distribution Schematics

 

Find here the full article of Wyckoff Patterns on TradingCenter: https://tradingcenter.org/index.php/learn/technical-analysis/329-wyckoff-method

The transition from a consolidating market to a trending market is marked by a price breakout.

 

Breakouts -Recognizing the Market Transition

 

A price breakout is the most important event on the chart for any trader. Breakouts mark the transition from a choppy and directionless market to a strong-trending market. The trend that emerges after a breakout can be extremely powerful and very profitable to trade. Traders who can identify this market transition at an early stage can take advantage of high Reward/Risk trades and trade profitably.

There are the key steps for successfully trading powerful breakouts:

(1) Identify a market that is entering a crucial price zone

(2) Wait for the market to complete its consolidation period (it may need a lot of time and discipline is required)

(3) Open the position after the breakout is confirmed (the confirmation is called the ‘last kiss’ and briefly explained later)

 

The False Breakout or else Fake-Out

The biggest problem with any breakout strategy is a false breakout or else a fake-out. A fake-out means that the price moves outside of the consolidation zone, signaling a breakout, but instead of forming a new trend, it retraces back inside of the consolidation zone. These failed breakouts are not as rare as you may think. Remember that financial markets are only trending 10-20% of all time. Thus, if financial markets tend to consolidate most of the time, it makes sense to have too many false breakouts.

 

False Breakouts and Markets with High-Leverage

Financial markets with too much trading leverage tend to have more false-breakouts than others. This can be explained as the use of high trading leverage forces market-makers to target the leveraged positions of retail traders by adopting stop-hunting techniques. Stop-hunting practices are unethical and sometimes illegal, but they are real.

  • Due to stop-hunting, high-trading leverage can indirectly lead to many fake breakouts on the chart
  • By monitoring ‘Open-Interest’ you may understand what is going on in the market, and confirm the existence of high trading leverage, or not
  • By monitoring the latest COT report (Futures market) you may ensure that you are not trading in the same direction with small speculators (Don’t trade in line with small speculators)

 

Using Price Patterns to Confirm Breakouts

There are a few powerful price patterns that can partially confirm a price reversal/continuation. If these patterns are printed within a price zone, they can offer a useful clue. I consider the “Rounding Top/Bottom” as the most reliable price pattern. “Cup and Handle” and “Head & Shoulders” are also interesting patterns. Pay less attention to any other price pattern.

You can find quite a few price pattern tutorials on TradingCenter.org:

 

 

Confirming the Transition -The Retouch Principle or else the ‘Last Kiss’

 

The retouch principle refers to a breakout setup and it is called the ‘Last Kiss’ by Alex Nekritin and Walter Peters. The last kiss setup aims to help traders avoid fake breakouts.

 

The Last Kiss Strategy for Avoiding Fake-Outs

The last kiss is a method of filtering out many of the fake-outs and confirming the consistency of the breakout signal. To take the last-kiss trade, the first step is to identify the consolidation zone, as seen in our previous charts.

  • The last-kiss trade is based on the fact that the market tends to come back to a significant zone after breaking it and expanding beyond the zone
  • The last-kiss trade is about waiting for the market to come back to the consolidation zone after the breakout, and only then taking the trade

 

The Last-Kiss Trade

Here are the detailed steps for taking the last-kiss trade:

  1. Draw support and resistance boxes on the chart (as in our previous examples)
  2. Be prepared as the price consolidates inside the box
  3. Be on alert as the price breakouts out of the zone
  4. Wait for the price to return near the consolidation box
  5. As the market prints a last-kiss candlestick on the edge of the box take the trade

Notes:

  • The last-kiss trade is a high-probability trade but it can offer no guarantees
  • Focus on the volume. Volume will normally peak during the breakout, however, at the point of the ‘last-kiss’, volume should not peak at all
  • If volume peaks during the last kiss, it may be a sign of a false breakout. Meaning that there might be a very large seller/buyer capable of canceling the breakout
  • Certain price patterns or Japanese Candlesticks can confirm your entries

 

Define your Strategy Before you Start Trading

 

The 12-Step Breakout Trading Strategy

 

Trading naked charts without indicators is an interesting approach. Indeed, applying too many indicators on the chart can be confusing and lead traders to make mistakes. I like to combine naked charts with RSI Precision, an indicator that I have developed in the past, and share it for free. I mainly use RSI Precision 3 to identify divergences on higher timeframes and for the powerful MACD signal on the monthly chart that I find quite reliable.

» More about the RSI Precision series of indicators

 

Overall, this is my 12-step breakout trading strategy

  1. Using solely high timeframes to analyze the market (Daily and above)
  2. Drawing major support and resistance lines on naked charts (only closings)
  3. Combining support and resistance to form price zones (2 Boxes)
  4. Identifying if the market is trending or consolidating within any crucial range
  5. If the market is trending -Deciding on the direction by observing the formation of higher highs/lows on high timeframes
  6. Observing how the market has recently behaved near major support and resistance levels
  7. Recognizing the potential formation of powerful price patterns inside the zone
  8. Seeking for RSI/MACD divergences on higher timeframes (naked traders will not do that)
  9. Monitoring ‘Open-Interest’ and the COT Analysis to understand what small speculators are doing (Don’t trade in the same direction as them)
  10. Waiting for a major zone breakout
  11. Confirming the breakout with volume (as explained above)
  12. Waiting for the ‘last kiss’ to take the trade

 

Happy trading!

 

Trading Naked (Charting & Price Zones)

George Protonotarios, financial analyst

For TradingCenter.org (c) October, 7 2024

 

Book Source: » https://www.amazon.com/Naked-Forex-High-Probability-Techniques-Indicators/dp/1118114019

 

 

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