If you get supremely excited by looking at a range of technical indicators on your trading terminal, shiny new tools to add to your daily charts, then pause for a while. There are plenty of traders who would vouch for naked chart trading as the more useful alternative. Indicators are very useful, but trading strategies shouldn’t be based only on them. Both styles have their own advantages. Let’s take a look.
Also known as Price Action Trading, this style is associated with trading without any indicators on charts, based on real-time price trends. Here, traders often use plain candlestick charts or singular patterns like pin bars. Trading without indicators is generally chosen to keep the charts clean. Traders love their indicators, and sometimes use too many of them, which clutters the charts and the mind. Experts believe that trading should always be done on simple terms, since the market is highly competitive and handling the psychological aspects of trading is difficult in itself.
Price action is data in its purest form. Indicators are simply derivatives of these price actions on the charts, hence they are mostly lagging. Lagging indicators are indeed useful in spotting trends and reversals. However, if you want to develop a high probability trade strategy, a leading indicator like price action is more useful.
The first step is to understand the market structure. This is about tuning yourself to the chart and studying the market momentum.
This step requires the trader to understand swing-highs and swing-lows. Market structure is the sum-total of these highs and lows on the chart. The order in which these new lows and highs occur will give you signals to determine the direction of the market. With this you can identify:
Swings are common around support and resistance levels. The process of identifying swings is discretionary and requires some practice. You may identify four types of swings – higher highs, higher lows, lower highs and lower lows.
A trending market can simply be defined from chart analysis, rather than using complex indicators. A bullish trend will continue to make higher highs and lows, signalling a buy. Bearish trends will generate lower highs and lower lows, where you would want to sell.
Ranging conditions or neutral markets create undesirable trading conditions. Since the price is trapped between two levels, you will get to see highs and lows continuously at the same levels. Since no specific upper or lower boundaries can be defined, traders identify swing points in the same area. Price action gets messy around the range boundaries, making it difficult to spot reversals.
Horizontal levels and trend lines can be used to identify price trend reversals. Many traders additionally use pivot points and Fibonacci levels for this. Support and resistance levels can point towards key points of reversals. Two likely scenarios exist here:
So, identifying uptrends and then the important support and resistance levels gives us likely turning points.
We can rely on charts to generate buy and sell signals. In naked charts, this is highlighted by a candlestick reversal pattern. A bearish rejection candle is a common sell signal.
Many traders believe that those who are trading by charts alone are at a significant advantage because they actually have the skills to read the actual markets, unlike those who rely on indicators, which entails more of intuition or luck. Indicators are just technical analysis tools that apply a formula to these price actions.
In this age of automated trading and expert advisors, indicators cannot be completely removed from the equation. The most common issue is that they are lagging. But, as explained earlier, this can be taken care of. In reality, price action also takes place on charts, after they are confirmed.
In the end, it is all about the preferences of each trader. Traders have to use both tools wisely and then figure out which one helps in making better trading decisions.
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