Trading Naked

For those of you who wonder how it is possible to trade without indicators, The basic idea is that a market is governed by buyers and sellers. If you can understand how buyers and sellers operate you can tell where the market is likely to turn. I basically look at market structure and use median lines as well as action/reaction lines to determine high probability areas to trade.

We all should know that support/resistance levels are important in trading. My question to you is – why are previous highs (in an uptrend) – resistance and why are previous lows support? (see crude diagram below)

basic

This sort of pattern happens over and over again on all timeframes. We have an uptrend that forms a pivot (a swing high or low is called a pivot). Price falls off before forming a new low pivot. It is a higher low. Remember – higher lows and higher highs is what defines an uptrend.

Lets focus on the three bars in the orange box. Notice how price moves up to the old high pivot – meets some selling and closes towards its lows. This happens for twelve hours before buyers are finally able to absorb all of the selling. So what causes this resistance? What are buyers and sellers doing that cause this?

Some traders got long toward the swing low and decide to take profits at the old highs. Breakout traders got long toward the last swing high, held on during the entire downswing and are happy to get out at breakeven. Other traders see that this level was resistance before and decide the market is likely to turn down again and sell at the previous high.

Buyers need to absorb all of this selling before the market can continue higher. The market moves because of buying and selling.

Price continues higher and forms a new swing high. Price then falls to the same level of the previous high and finds support. What causes resistance to become support? Think about it logically. Try to imagine the emotions traders are feeling when they see those two scary down bars. You have the one of the biggest down bars on the chart and then three bars later price rallies to make new highs before falling all the way back down and closing near its lows.

Traders start thinking – “this market is falling away” – “the trend is changing”. All sort of irrational ideas start to pop into most retail traders heads. This is why drawing support and resistance levels is so important. You can see right away that regardless or how scary a bar is – price has not taken out the first level of support.

The other thing to know is that support and resistance levels don’t only occur horizontally but also diagonally. If you look at the second chart – you see a longer-term view of the same market. Notice the two upsloping trend lines. These are called multi-pivot lines because they intersect many pivots. I’ve draw circles around all of the pivots that the lower multi-pivot line intersects.

There are many high probability trades on this chart based on just these two lines. You could simply buy at the lower blue line with a stop below the previous pivot low and take profits at the upper blue line. The last three circles were all entries that I took.

The last important thing about these multi-pivot lines is that they have the same slope. When I frame trades I always use parallel lines. I would say that these lines carry the frequency of price (a term Timothy Morge coined). We will look at this chart in even more detail in the future. I doubt any set of indicators could out-perform these simple lines in terms of taking high probability trades.

AUDUSD2

Everyone has their own trading style but I never short in an uptrend. You gain a 30% edge by trading with the trend.

 

ranges

Understanding ranges and how to trade them is an essential skill when trading off of price action. Wyckoff taught about two common setups know as springs and upthrusts. These are two names for the same price action – one in uptrends and one in downtrends. You can become rich if you can master this simple setup. Springs and upthrusts occur in all markets and on all timeframes. The idea is simple – price moves beyond a defined trading range and then returns to the range before surging out the other side.

natural gas

Lets take a look at a chart to make this more clear. I have divided the chart into six ranges. Price is in an uptrend. In five of the ranges there was a successful spring. Price breaches a well defined swing low before returning to the range and moving out to the other side.

Why does this trade work? Basically the bigger players in the market and trying to run stops. When they breach a swing low a few things happen:

1 – some traders who were long get stopped out of their positions or chicken out (selling)
2 – some breakout traders get short (selling)

But all of this selling with a price breach and still price doesn’t head much lower?! Price then moves back into the range. As David Weis would say – its like a boxer just got knocked out of the ring and you think the fight is over but he climbs back into the ring and starts slugging on the other guy. How can this happen.

This only makes sense if someone is buying.

3 – some bigger buyers gobble up all of the selling
4 – selling dries up and the market moves higher.
5 – the people who got short need to buy to cover their losses (buying)
6 – people who got stopped out of their longs want to jump back on (buying)
7 – the increasing volatility attracts more buyers (buying)

The big player gets pushed to profit by the traders who were late to the party or who got the direction wrong. A word of warning about this setup. Springs fail in downtrends and upthrusts fail in uptrends. Trade in the direction of the market.

Defining a range properly and understanding trend is the only challenge to trading this price action. When I draw a range I always start with a low or high and then draw the range off of the next swing in the opposite direction.