Trading naked, or price action trading, as it is more commonly known, is simply going “indicator-free.” You examine in real time what is happening with price, without it hiding behind a maze of indicators, and then decide on the path of least resistance, which forms the basis of your buy or sell signals.
“Analysis paralysis” is among the most common newbie trading mistakes. Beginners to the market use a thousand and one technical indicators to plan a trade, reckoning that the more they use, the more will be their odds of profiting.
With the exponential growth in online cryptocurrency trading platforms, technical indicators are just a few clicks away for the average, retail trader. This has resulted in such a dire situation whereby most traders no longer follow cryptocurrency price action, but instead rely solely on indicator signals.
The critical drawback to such a strategy is that almost every technical indicator is derived from price, and is therefore lagging in nature.
Dow Theory Revisited
Proponents of the century old “Dow Theory” believe that everything there is to know about an underlying asset is included in its price, making the use of indicators redundant. The Dow Theory defines a trend as series of rising swing/pivot lows (uptrend) or declining swing/pivot highs (down trend).
Trend is nothing but the broader direction in an underlying asset. Prices don’t move in straight lines. They invariably retrace after a strong move. The position and direction of these retracements were used by subsequent followers of Dow Theory to define a trend. The below screenshots of ETHUSD and BTCUSD explain how to identify a market’s trend by merely looking at price.
Downward Trend ETHUSD– 5 Minute Chart
(past performance is not indicative of future price behaviour)
Within every market trend, there are periods of price retracement or consolidation, which provide traders the opportunity to enter in the direction of the main market move. To detect a retracement within a trend, we switch to a lower time frame chart and wait for a contra-trend move to unfold. In case of the broader trend being up, this is confirmed by the formation of lower swing/pivot highs on the shorter time frame chart.
Our task now as traders is to search for signs of this pullback ending. Traders can initiate long positions at the break of the last pivot high on the lower time frame, which will also signal the resumption of the main uptrend. In case the dominant trend is down, the ideal place to enter short is the end of a contra-trend rally on the lower time-frame chart window, signalled by the breach of the last clear swing/pivot low.
Long Trading Naked Setup
Let us now look at an example to understand how to find buy opportunities within an uptrend.
The 15 minute chart of BTCEUR shows the formation of a series of higher pivot lows. This indicates the trend is up. The idea now is to wait for a sign of weakness on a lower time frame within this bullish trend.
On the 3 minute chart, a pullback is first plotted, the end of which is marked by a convincing breakout above the last major swing high. Traders can enter long here, with a stop loss just below the last price trough on the 3 minute chart.
Short Trading Naked Setup
The following charts of ETHUSD will illustrate how to isolate shorting opportunities within a down trend. The 15 minute trend is down as demonstrated by the consecutive lower pivot highs. The market bias is bearish, and we shift to the 3 minute window to initiate shorts once the counter-trend bounce back fades.
On the 3 minute chart, the plotting of successive higher pivot lows indicates that a secondary rally is taking place. We enter in to a short trade as soon as the last pivot low is taken out, as depicted in the following chart.
Trading Naked Advantages
- Following price action keeps trading simple.
- Pure price action strategies can be applied across any time-frame and cryptocurrency, especially ones that are highly volatile.
- Price action analysis works great in both trending and range-bound markets.
- Price action strategies factor in all market variables.
The Final Word
Just like any other financial asset, trading cryptocurrencies is laden with innumerable uncertainties. Traders should desist from further complicating the process by filling their charts with 5 or 10 technical indicators. Knowledge of trends and a few basic charts patterns is more than sufficient to successfully navigate the markets, whether you are a day trader or a long-term investor.