Chapter 4: Naked Chart Trading Techniques

Introduction

Naked chart trading represents one of the purest forms of technical analysisA method of forecasting future price movements based on the study of historical price data, charts, and indicators., focusing exclusively on price action without the distraction of indicators. By stripping away everything except price itself, traders can develop a clearer understanding of market dynamics and make more decisive trading decisions. This approach is particularly valuable for intermediate traders looking to refine their analytical skills and develop a more intuitive feel for market movements.

In this chapter, we’ll explore the philosophy behind naked chart trading, examine specific techniques for analyzing clean charts, and develop practical strategies that can be implemented in your trading routine.

The Philosophy of Naked Chart Trading

Naked chart trading is built on several fundamental principles:

Price is the ultimate truth: While indicators can provide insights, they are derivatives of price and often introduce lag. Price itself represents the purest expression of market sentiment.
Simplicity leads to clarity: By removing indicators, you eliminate potential contradictions and confusion, allowing for clearer decision-making.
Skill development through observation: Trading naked charts forces you to develop pattern recognition skills and market intuition that indicators might otherwise substitute.
Focus on what matters: Without indicators, you naturally focus on the most important aspects of price action: trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). direction, supportA price level where buying interest is strong enough to prevent the price from falling further./resistance, and significant price patterns.

Setting Up Your Naked Charts

To properly implement naked chart trading, you need to configure your charts appropriately:

Essential Chart Elements

While “naked” implies removing all extras, certain basic elements remain useful:

Candlesticks or bars: Choose a clean, easily readable chart type (candlesticks are generally preferred for their visual clarity)
Volume (optional): While some purists exclude even volume, it can provide valuable confirmation without cluttering analysis
Key horizontal levels: Major supportA price level where buying interest is strong enough to prevent the price from falling further. and resistanceA price level where selling pressure is strong enough to prevent the price from rising further. levels from previous price interaction
Clean background: Use a neutral background color that reduces eye strain during extended analysis

Elements to Remove

To create truly naked charts, remove:

All technical indicators: RSI, MACD, Stochastics, Moving Averages, etc.
TrendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). lines (initially): While trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). lines can be useful, begin analysis without them to see pure price action
Fibonacci retracements/extensions: These can be added selectively for specific analysis but start without them
Pivot points and other calculated levels: Focus only on levels created by actual price action
Grid lines: These can distract from seeing natural price patterns

Core Naked Chart Analysis Techniques

1. Swing Point Identification

The foundation of naked chart analysis is identifying significant swing points:

Swing Highs:

A peak with lower highs on both sides
Represents a point where buyers temporarily lost control to sellers
More significant when formed with higher volume and larger candles

Swing Lows:

A trough with higher lows on both sides
Represents a point where sellers temporarily lost control to buyers
More significant when formed with higher volume and larger candles

Practical Application:

Connect swing highs to identify potential resistanceA price level where selling pressure is strong enough to prevent the price from rising further. levels
Connect swing lows to identify potential supportA price level where buying interest is strong enough to prevent the price from falling further. levels
The more times a swing point has been tested, the more significant it becomes

2. Market Structure Analysis

Without indicators, market structure becomes your primary analytical framework:

Uptrend Structure:

Series of higher highs (HH) and higher lows (HL)
Each pullback terminates at a higher level than the previous pullback
Uptrend remains intact until a lower low forms

Downtrend Structure:

Series of lower highs (LH) and lower lows (LL)
Each rally terminates at a lower level than the previous rally
Downtrend remains intact until a higher high forms

Consolidation Structure:

Price contained within a defined range
Neither buyers nor sellers able to take decisive control
Often precedes significant directional moves

Structure Breaks:

Break of structure (BOS): When price breaks a significant swing high/low
Change of character (CHoCH): When price creates a higher high after a series of lower highs (or vice versa)
These events often signal potential trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). changes

3. Clean Chart Pattern Recognition

Without indicators, your ability to recognize patterns becomes crucial:

Reversal Patterns:

Double tops/bottoms: More reliable when formed at significant swing points
Head and shoulders: Focus on the neckline break for confirmation
Rounding formations: Gradual shifts in market sentiment

Continuation Patterns:

Flags and pennants: Look for the preceding “flagpole” move for context
Triangles: Pay attention to volume contraction during formation
Rectangles: Horizontal trading ranges with clear boundaries

Candlestick Patterns:

Engulfing patterns: More significant when they engulf multiple previous candles
Pin bars: Focus on the location relative to market structure
Inside bars: Look for decreasing volume suggesting coiling energy

4. Empty Space Analysis

A unique aspect of naked chart trading is analyzing the “empty space” between price movements:

Gaps:

Areas where price jumps without trading in between
Often indicate strong sentiment shifts
Typically get “filled” eventually as price returns to trade through the skipped area

Imbalance Zones:

Areas where price moved rapidly with minimal trading activity
Often created during news events or sudden liquidity changes
Frequently revisited as the market seeks to establish fair value

Fair Value Gaps (FVGs):

Specific type of imbalance where a candle’s low is above the previous candle’s high (bullish FVG) or a candle’s high is below the previous candle’s low (bearish FVG)
Represent areas of significant order imbalance
Often act as magnets for future price movement

5. Volume Profile Analysis

While maintaining a clean chart, volume profile analysis can provide valuable insights:

Volume Clusters:

Areas where significant trading activity occurred
Often form at important decision points in the market
Frequently act as supportA price level where buying interest is strong enough to prevent the price from falling further./resistance in future price action

Low Volume Nodes:

Areas with minimal trading activity
Price tends to move quickly through these zones
Often represent areas of imbalance between buyers and sellers

Volume Divergence:

Decreasing volume during price advances suggests weakening momentum
Increasing volume during price declines often indicates capitulation
Volume should ideally confirm the price direction in healthy moves

Advanced Naked Chart Trading Concepts

1. Order Block Identification

Order blocks represent areas where significant buying or selling occurred before a strong move:

Bullish Order Blocks:

The last significant down candle before a strong upward move
Often revisited later as supportA price level where buying interest is strong enough to prevent the price from falling further.
Entry strategy: Look for rejection from the order block when price returns to it

Bearish Order Blocks:

The last significant up candle before a strong downward move
Often revisited later as resistanceA price level where selling pressure is strong enough to prevent the price from rising further.
Entry strategy: Look for rejection from the order block when price returns to it

2. Liquidity Engineering

Understanding how large players engineer liquidity can provide an edge:

Stop Hunts:

Price briefly pushes beyond obvious supportA price level where buying interest is strong enough to prevent the price from falling further./resistance to trigger stop losses
Often followed by a reversal in the opposite direction
Identification: Sharp spike beyond a level with immediate reversal

Liquidity Voids:

Areas on the chart with minimal historical trading activity
Price tends to move rapidly through these zones
Trading approach: Prepare for accelerated price movement when approaching these areas

3. Wyckoff Analysis on Naked Charts

The Wyckoff method becomes particularly powerful on naked charts:

Accumulation Phases:

Preliminary SupportA price level where buying interest is strong enough to prevent the price from falling further. (PS): Initial supportA price level where buying interest is strong enough to prevent the price from falling further. after a downtrend
Selling Climax (SC): Capitulation with high volume
Automatic Rally (AR): First significant bounce
Secondary Test (ST): Retest of the SC low
Spring: Final shakeout below supportA price level where buying interest is strong enough to prevent the price from falling further. before upward move

Distribution Phases:

Preliminary Supply (PSY): Initial resistanceA price level where selling pressure is strong enough to prevent the price from rising further. after an uptrend
Buying Climax (BC): Euphoric buying with high volume
Automatic Reaction (AR): First significant pullback
Secondary Test (ST): Retest of the BC high
Upthrust: Final shakeout above resistanceA price level where selling pressure is strong enough to prevent the price from rising further. before downward move

4. Multi-Timeframe Confluence

Combining naked chart analysis across timeframes creates powerful setups:

SupportA price level where buying interest is strong enough to prevent the price from falling further./Resistance Alignment:

When key levels align across multiple timeframes
Creates stronger zones for potential reversals
Trading approach: Look for rejection candles at these multi-timeframe levels

Structure Breaks Across Timeframes:

When market structure changes on multiple timeframes simultaneously
Often signals significant trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). changes
Trading approach: Enter in the direction of the new trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). after confirmation

Practical Naked Chart Trading Strategies

1. Swing Point Strategy

Setup:

Identify the prevailing trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). using swing high/low analysis
Wait for a pullback to a previous swing point
Look for a rejection candle at the swing point

Entry:

Enter when price resumes in the direction of the trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend).
Confirm with increased volume (if using volume)

Stop Loss:

Place stop loss beyond the swing point
Alternative: Place stop beyond the rejection candle

Take Profit:

Target the previous swing high/low in the trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). direction
Consider trailing stops to capture extended moves

2. Structure Break Strategy

Setup:

Identify a clear market structure (uptrend, downtrend, or range)
Watch for a break of structure (BOS)
Wait for a retest of the broken structure

Entry:

Enter when price confirms the new direction after the retest
Look for a rejection candle at the retest level

Stop Loss:

Place stop loss beyond the retest swing point
Size position based on this stop placement

Take Profit:

Project the height of the previous structure for initial target
Look for the next significant structure level for extended targets

3. Order Block Strategy

Setup:

Identify a strong directional move on your timeframe
Locate the last opposing candle before the move (the order block)
Wait for price to return to this order block

Entry:

Enter when price shows rejection from the order block
Confirm with a strong rejection candle

Stop Loss:

Place stop loss beyond the order block
Alternative: Place stop beyond the rejection candle

Take Profit:

Target the previous swing extreme
Consider multiple targets with partial position exits

Risk Management for Naked Chart Trading

Without indicators, risk managementStrategies and techniques used to limit potential losses in trading. becomes even more critical:

Position SizingDetermining the appropriate size of a trade based on risk tolerance and account balance.:

Risk a consistent percentage of your account on each trade (1-2% recommended)
Calculate position size based on the distance to your stop loss
Consider reducing position size during periods of high volatilityThe degree of price fluctuations in a market or currency pair over a period of time.

Stop Loss Placement:

Use logical stop levels based on market structure
Place stops beyond significant swing points
Avoid using arbitrary pip values for stops

Multiple Time Frame Validation:

Confirm setups on at least one higher timeframe
Ensure you’re not trading against a stronger trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend).
Use lower timeframes only for entry precision, not decision-making

Creating a Naked Chart Trading Plan

To effectively implement naked chart trading:

Select your preferred timeframes:

Higher timeframe for trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). identification
Trading timeframe for setup identification
Lower timeframe for precise entry

Define specific setups:

Choose 2-3 specific patterns or setups to focus on
Document exact criteria for valid setups
Create a checklist for trade qualification

Establish precise entry criteria:

Define exactly what constitutes a valid entry signal
Determine whether you’ll use market or limit orders
Consider time-based filters (avoiding entries near major news)

Set clear exit rules:

Define stop loss placement methodology
Establish take profit targets
Create rules for trailing stops or partial exits

Implement a journaling system:

Screenshot setups before entering
Document reasons for entry
Record outcomes and lessons learned

Interactive Simulation: Naked Chart Trading Exercise

To help you practice these concepts, we’ve created an interactive simulation where you can apply naked chart trading techniques to historical price data. This simulation allows you to:

View clean price charts without indicators
Identify key swing points and market structure
Mark potential supportA price level where buying interest is strong enough to prevent the price from falling further. and resistanceA price level where selling pressure is strong enough to prevent the price from rising further. levels
Practice recognizing naked chart patterns
Make trading decisions and receive feedback

Access the simulation at: Naked Chart Trading Simulator

Case Study: EUR/USD Naked Chart Analysis

Let’s analyze a real-world example on the EUR/USD 4-hour chart:

Scenario:

EUR/USD has been in a downtrend with clear lower highs and lower lows
Price forms a double bottom pattern at a previous swing low
A break of structure occurs when price creates a higher high
Price pulls back to retest the broken structure (previous lower high)

Analysis:

The double bottom at supportA price level where buying interest is strong enough to prevent the price from falling further. suggests potential buying interest
The break of structure (higher high) indicates a possible trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). change
The pullback to previous structure provides a potential entry opportunity
Volume increases on the upward move, confirming buyer interest

Trading approach:

Enter long when price shows rejection from the retest level
Place stop loss below the retest swing low
Set first target at the recent swing high
Set final target at the next significant resistanceA price level where selling pressure is strong enough to prevent the price from rising further. level
Trail stops after price reaches the first target

Conclusion

Naked chart trading represents a powerful approach for intermediate traders looking to develop a deeper understanding of price action and market dynamics. By removing the distraction of indicators, you can focus on the purest expression of market sentiment—price itself. While this approach requires more experience and judgment than indicator-based methods, it offers greater clarity, earlier signals, and a stronger foundation for long-term trading success.

In the next chapter, we’ll explore Order Flow Analysis, which will build upon these naked chart concepts to develop an even more sophisticated understanding of market dynamics.

Key Takeaways

Naked chart trading focuses exclusively on price action without indicators
Swing point analysis forms the foundation of naked chart trading
Market structure provides the framework for understanding trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). direction
Clean chart patterns often provide earlier signals than indicator-based approaches
Advanced concepts like order blocks and liquidity engineering offer deeper insights
Effective risk managementStrategies and techniques used to limit potential losses in trading. is essential for naked chart trading success
A systematic approach with clear rules is necessary for consistent results