by Greg Capra, President and CEO at Pristine.com
Trading naked isn’t about trading in the nude, but could that have some advantages? Maybe in Forex trading, since Forex traders tend to be into more of the esoteric side of trading. All kidding aside, trading naked means removing those things that stop your eyes from seeing the clean beauty of price movement alone. What I am talking removing is indicators, Fibonacci lines, Trendlines, Bollinger Bands, Pitchforks, Waves, Gann, etc. None of these can provide you any more information that isn’t already there.
For this Chart of the Week (COTW), I am not going to discuss indicators like MACD, Stochastic, RSI, Williams percent R or the hundreds of others that are available – other than to say they are unnecessary and should not be used at all. The current market should be enough to prove you that the concepts of overbought and oversold are meaningless, useless and misleading. Release yourself from them and thing will make sense.
The first trading tool covered will be trendlines. These, in theory are supposed to locate support or resistance and probable turning points by connecting dots of swing lows in an uptrend or swing lows in a downtrend. Then the line is projected into the future. The longer the trendline, the more meaningful it is supposed to be as a reference point. Once broken to the downside within an uptrend, that line is supposed to have the opposite effect. If it was support, it will become resistance and vice versa. This is all trendline theory, which if you study this by drawing enough lines and then observe what then happens you will see how ambiguous this becomes.
Pristine Tip: the analysis of support and resistance must be done horizontally, never diagonally.
The next trading tool is Bollinger Bands. These consider the volatility of the instrument being traded a deviation (typically 2, but it’s adjustable) above and below a 20-period moving average. When the bands come together it suggests that an increase in volatility is ahead. When the bands are wide it suggests that a decrease in volatility is at hand. When prices move to either band, that band is supposed to act as support (lower band) or resistance (upper band). As you can see from the above chart, prices can and do hug the upper band and do not have to back away. An instrument in a strong downtrend can hug the lower band (not shown) and continue lower without reversing. Realize that what are narrow bands or wide bands can be very different for different stocks, commodities or currencies. We have not ever touched on using multiple time frames. Bollinger Bands are another vague trading tool that many use and teach. Are you ready to start trading naked?
Pristine Tip: the analysis of support and resistance must be done horizontally, never diagonally.
In the above chart I have drawn Fibonacci lines from several swing highs and lows. As you can see many of the turning points were caught by a line. The theory here is, if you draw enough lines – you can always catch the turning point – in the past. So many traders are caught up in this idea of a golden ratio in all things, so it must be in the markets as well. A widely followed concept by Fib enthusiasts is when Fib Lines overlapping other Fib Lines you’ll find the hidden support and resistance places in stocks, commodities and currencies. From this cliff into the abyss of the black hole of technical analysis you may find yourself in a Gartley pattern, a Square of Nine or in the 5th wave of an Elliot count.
If you are standing on that edge, please – carefully back away and find comfort in that you’re at Pristine.
Above is the same chart viewed without the hocus-pocus analysis tools; it’s a naked chart. I have only drawn a few horizontal lines at prior turning points where buyers stepped up in the past. Once you’ve looked to the left and since a prior turning point, take note of that area. Once price retrace to it that is where buyers will show up again. Next step is to let a recognizable candle pattern setup. Ideally, I like some type of failure or shock pattern aligned with mS or MS.
Pristine Tip: the analysis of support and resistance must be done horizontally, never diagonally.
Join us the week for an After Market Lessons where we will share with you more simple, yet powerful concepts to find trading opportunities.
Greg Capra, President and CEO at Pristine.com
