Naked Forex

Walter Peters, PhD

www.fxjake.com

NAKED FOREX: BONUS CHAPTERS

FXjake Home Page

Naked Forex

Walter Peters, PhD

www.fxjake.com

Chapter 17: The First Naked Trader “A complex system that works is invariably found to have evolved from a simple system that works.” -John Gaule

The first naked trader was not even a trader. He was a grocer. He fell into trading almost by accident. He is, perhaps, the most famous unknown trader in the brief history of trading. And you may have a difficult time believing how he traded, even though he was, by all accounts, immensely successful. His trading life started almost by accident. He sold food to various grocers around the country, and became involved in trading coupons good for a later delivery of food. Today these coupons are known as futures contracts. Futures contracts are simply a method of buying food for the future (delivered at a later date) at today’s prices. This is a great tool for grocers as they can lock in the price they pay for food, knowing what they will have to sell the food for to turn a profit. Futures are still used today for farmers and companies buying and selling a vast variety of foods, from soy beans to oranges. But the original naked trader was interested in trading futures not only because he distributed food to other grocers, but because he saw the potential to make a profit by buying and selling the futures contracts at well-timed turning points in the market. He used two tools to identify when the market was turning: the first tool was information and the second tool was a special type of chart.

The Trading Information Network The first naked trader lived in a time before computers, so he traded as best he could without instant access to price quotes. In fact, he put an incredible amount of effort into creating a system so that he could gather price information from each marketplace, as there was not a central trading

Naked Forex

Walter Peters, PhD

www.fxjake.com

location. He is viewed as a pioneer in this regard, the first person to create a network of trading information. The network was made up of informants who would send price information from the local market to the next informant. As you probably know, the forex market is also spread across many markets; there is no one central location for trading currencies (unlike the share market, where stock exchanges serve as the only place traders can buy and sell shares). So our first naked trader had much in common with today’s forex trader. But his network was ingenious because it connected markets long before telephones, cars or telephones. His network of 100 market informants, each about 6 kilometers apart, created a 600 kilometer communication network. The naked trader knew what the prices were in each of the various markets, because his informants could easily communicate prices to the nearest market informant and pass this information across the network. But this was only part of the naked trader’s formula for success. He had a great market information network, but he also had unique charts.

The Naked Charts The first naked trader had a secret weapon. He used candlestick charts.

Figure 1: The first naked trader developed candlestick charts as a tool for making trading decisions.

Naked Forex

Walter Peters, PhD

www.fxjake.com

This was an innovation at the time; candlestick charts enabled him to “see” where the market was moving. He was able to “see” market strength and weakness, simply by paying attention to the candlestick formations. You can do this also, by now you can read and identify high probability naked trades based on the candlestick patterns you have learned in this book. For example, you know that the very best Big Shadow trades (Chapter 6) will have a closing price near the extremes. Bearish big shadows will have a close near the candlestick low, and the bullish big shadows will have a close near the candlestick high. This is the type of information that the first naked trader used to accumulate large profits in the futures market. The first naked trader was Homma Munehisa, and although there is much controversy surrounding the details of his trading, one thing is very clear. Homma used simple charts to find extraordinary profits. Homma found on average $10 billion in trading profits each year, by the end of his trading career he accumulated $100 billion in trading profits1.

Homma and Simple Trading Today it is common for many traders assume that new tools, new indicators, and better computers are needed to create and trade a system that will consistently find profits. Homma had none of this and he still found it possible to find billions of dollars in profits in the markets. Homma understood the most important factor in any market. He understood the value of a simple trading system based on candlesticks. The candlestick start offers critical information for any trader and a simple to view form. The high, the low, and the opening price and the closing price are all available in one quick glance. Not only that, but these candlesticks also enable a trader to see where the market has repeatedly reversed in the past (support and resistance zones). One critical piece of information that a candlestick provides is where the market closed during that timeframe. So, a weekly candlestick provides the naked trader with the closing price for the week, and likewise the one hour candlestick provides the naked trader with a closing price for the hour.

1

Based on today's dollars.

Naked Forex

Walter Peters, PhD

www.fxjake.com

Often, the closing price will provide a naked trader with critical information about the market and a nearby zone. In other words, if the market is falling and yet is unable to close beneath a zone it often means that this zone will hold. This usually means that the zone will provide support. In the opposite scenario, when the market has been writing for some time, in the market is unable to close above the zone it usually means that the zone will provide resistance. Obviously kangaroo tails and big shadows are great examples of the market's inability to penetrate a zone, but sometimes other candlesticks that do not fit the criteria of a big shadow or a kangaroo tail can provide excellent clues about what the market may be doing in the near future.

Figure 2: The market was unable to close above the 1.5725 zone on the GBP/USD 4 hour chart. This was a hint that the market would not trade higher than this zone.

Naked Forex

Walter Peters, PhD

www.fxjake.com

Figure 3: The market immediately falls 64 pips after closing underneath the 1.5725 on the GBP/USD 4 hour chart.

Homma understood the value of the candlestick - the relationship between the open, the close, the high and the low are obvious in the candlestick. The closing price is represented very clearly with candlestick charts. The color and shape of the candlestick is determined by the closing price. The reason Kangaroo Tails (Chapter 8) are so obvious on a candlestick chart is because the open and close are very close, so the candle takes on a very distinct appearance, with a long “kangaroo tail.”

The Importance of the Closing Price How did Homma trade? There are many theories and only a few clues that he left behind. We do know that the open, close, high price and low price were important to Homma. Homma probably paid close attention to the closing price. The closing price is critical for all of the important naked candlestick formations - Kangaroo Tails (Chapter 8), Big Shadows

Naked Forex

Walter Peters, PhD

www.fxjake.com

(Chapter 6) and Big Belts (Chapter 9). The closing price is a critical piece of information and the closing price is very plain to see on a candlestick. A close look at the current closing price on a candlestick in relation to recent closing prices will help the naked trader to find high probability trade setups. In the next chapter you will learn how the naked trader can use the closing price in relation to other recent closing prices to find high probability trade setups.

Naked Forex

Walter Peters, PhD

www.fxjake.com

Chapter 18: The Bend Trade “I am a man of fixed and unbending principles, the first of which is to remain flexible at all times.” -Everett Dirksen

The naked trades you have read about in this book, to this point, have all had a few things in common. The trades occur on a support and resistance zone. The trades involve the printing of a specific price pattern, a catalyst for price to bounce off a zone. Each price pattern has a defining characteristic. The Kangaroo Tail (Chapter 8) has the long tail, the Belt (Chapter 9) has the gap opening followed by the strong close in the opposite direction, the Big Shadow (Chapter 6) is a giant candlestick among dwarf candlesticks, and so forth. The Bend Trade is completely different to the other trades in this book. The Bend Trade is a simple way to view support and resistance zones in real time without candlestick patterns. In some ways the Bend Trade is naked trading in the purest form. The Bend Trade is a simple way to trade using only the closing price and support and resistance zones. For a trader used to looking at indicators, trading the Bend Trade may seem difficult to fathom, but it is an extremely powerful way to find reversals in the markets. An example will best illustrate how this works. Take a look at the chart in Figure 3 below, this is the 4-hour NZD/USD chart, and there is a clear support and resistance zone at 0.7755, the market has repeatedly found support on this zone. When the market approaches the 0.7755 zone again, it is unknown whether the market will push through the zone and extend beyond the zone or the market will again reverse. However, a close examination of the candlestick that touches the zone, and particular attention paid to the closing price of this candlestick will help the naked trader to decide whether or not the market will rebound off of this zone.

Naked Forex

Walter Peters, PhD

www.fxjake.com

Figure 3: There is a clear support and resistance zone on the NZD/USD 4-hour chart. The market has repeatedly found support at this 0.7555 level. This is the first step of The Bends Trade.

In figure 4 the NZD/USD 4-hour chart shows the market falling beyond the critical support and resistance zone at 0.7755, and now the market has come back to ward this zone, and has touched the zone from below. The 0.7755 zone was once support, and it is now resistance. The market was unable to close beyond the zone. For the naked trader, this is an absolutely critical piece of information. Notice how the big bearish daily bar closes below the 0.7755 zone.

Naked Forex

Walter Peters, PhD

www.fxjake.com

Figure 4: After breaking through the 0.7755 zone on the 4-hour NZD/USD chart, the market once again touches this zone. This time the touch is from below the zone, and the closing price is below the zone. This is an important clue for the naked trader.

The close below the zone is a signal to the naked trader that a trade opportunity may come soon. But patience is needed. The market may blast back up above the zone, in fact, many Big Shadows print in these situations. So the naked trader waits. After the market closes beyond a zone, the naked trader looks for the market 1) trade away from the zone for some time and then 2) come back to this zone to touch the zone from the other side. So, once the market pushes through a zone from below and breaks resistance, the naked trader looks for the market to touch the zone again and find support. Likewise, once the market falls through a zone and breaks support, the naked trader looks for the market to eventually trade higher and touch the zone again and find resistance. Figure 4 shows the NZD/USD 4-hour chart. The market has come back to touch the 0.7755 zone once again, but this time the market touches this zone from below, so a sell trade may be in order. The naked trader knows to wait for the market to print a bearish candlestick to confirm that the market has found resistance where there was once support. After this bearish candlestick prints on the chart, the naked trader is free to sell the market, knowing that it is likely the market will fall.

Naked Forex

Walter Peters, PhD

www.fxjake.com

Figure 5: Three consecutive closes beneath the zone, the market is probably not going to break above the zone. The naked trader may be looking to take a sell trade.

Another way for the naked trader to “see” these reversals is to look at a line chart. A line chart will bend when price comes back to touch a zone. When support becomes resistance, such as the 0.7755 zone, the bend in the line chart signals that the Bends trade is ripe and ready to go.

Figure 6: When the line chart bends on a zone, the naked trader knows a trade opportunity is available.

Simply waiting for the bend in the line chart, the naked trader can wait for the closing prices to confirm that the market will like find support (or resistance) on a zone, and thus take a Bend trade (see Figure 6).

Naked Forex

Walter Peters, PhD

www.fxjake.com

Another example will illustrate how precise these Bends trades can be, and they are clearly illustrated on the line chart. In Figure 7 the USD/CHF 4-hour chart is presented. This chart shows the importance of the closing price, and how the closing price can signal an ideal trade entry.

Figure 7: After falling through the 0.9079 zone, the NZD/USD closing price on the 4-hour chart. When the line chart bends on a zone, the naked trader knows a trade opportunity is available. The bend at the zone suggest the market is ready to trade lower.

The market bends because the USD/CHF on the 4-hour chart is unable to close above the 0.9079 zone. This is a clue that the market may fall soon. This bend gives the naked trader reason to be alert - a sell opportunity may be available. As can be seen in Figure 8, the market does indeed fall lower after printing this bend on the chart. The closing price is the key here. The market could not close above the zone, and thus the bend printed on the line chart, precisely on the zone. The bend at the 0.9079 zone provides the naked trader with an excellent trading opportunity - a Bends trade is in play.

Naked Forex

Walter Peters, PhD

www.fxjake.com

Figure 8: After the Bend at the 0.9079 on the 4-hour USD/CHF chart, the market falls over 50 pips. The Bends trade at this critical 0.9079 provides the naked trader with an ideal sell trade entry.

The three critical features of this sell trade setup are as follows: first, the market fell quickly through the 0.9079 zone, second, once the market traded back up to the 0.9079 zone it was unable to close above the 0.9079 zone, and third, the market printed a bend in the line chart at the zone, suggesting the market had found resistance and would soon fall. An interesting feature about this trade is that it would not have been a traditional naked trade - a quick look at the candlestick chart in Figure 9 reveals that there is no classic candlestick pattern such as the Kangaroo Tail (Chapter 8), Big Belt (Chapter 9) or Big Shadow (Chapter 6), instead the market simply hit the zone and then fell. The signal for this trade is simply the bend in the line chart at the zone, visible on the line chart.

Naked Forex

Walter Peters, PhD

www.fxjake.com

Figure 9: Notice that there is no catalyst at the zone. Instead, price simply hits the zone and finds resistance. The market does not print a reliable price pattern at the 0.9079 zone on the 4-hour USD/CHF candlestick chart. These Bend trades are only visible on the line chart.

The market bends because the USD/CHF on the 4-hour chart is unable to close above the critical 0.9079 zone. The signal is the bend in price, as there is not a high-probability trading pattern on this chart. This is the defining feature of the Bend trade. The stop loss for the Bend trade is placed a few pips behind the highest high (for sell trades) or lowest low (for buy trades) at the bend. The stop loss placement is shown in Figure 10, slightly above the highest high of the bend in the chart.

Naked Forex

Walter Peters, PhD

www.fxjake.com

Figure 10: For the Bend trade, the stop loss is placed just behind the highest high on a sell trade. (Obviously for a buy trade the stop is placed a few pips below the lowest low of the bend.)

One More Bend Trade Example One more Bend trade example is in order, this time it is on the 4-hour AUD/USD chart. Notice in Figure 11 how the market moves up to the 1.0062 zone before finding resistance and falling. This is a clear sign that the market has respected this zone. The market has found resistance on this zone.

Naked Forex

Walter Peters, PhD

www.fxjake.com

Figure 11: The market finds resistance at the 1.0062 zone on the 4-hour AUD/USD chart. This zone will become important later.

Figure 12 shows the same chart as Figure 11, but in the line chart format. The line chart clearly indicates that the bend is at the 1.0062 zone.

Naked Forex

Walter Peters, PhD

www.fxjake.com

Figure 12: This is the line chart version of the same chart in Figure 11. The “bend” on the AUD/USD 4-hour chart at 1.0062 is very clear in this line chart.

Later, the market blasts through the 1.0062 zone (see Figure 13) and then comes back to touch the zone. This “bend” in the chart is the trigger for the Bend trade. Notice how the AUD/USD comes back to the zone on the line chart almost to the pip. The closing price on the first touch, where the market found resistance is at 1.0062 (Figure 12). The closing price for the bend, where the market finds support is at 1.0060 (Figure 13).

Naked Forex

Walter Peters, PhD

www.fxjake.com

Figure 13: The AUD/USD 4-hour chart has a clear zone at the 1.0062 level. The market blows through this zone and then comes back to touch the zone almost to the pip. This is a very clear bend in the chart, thus it is also a nice looking bullish Bend trade setup.

As soon as the market completes a bend, the Bend trade is triggered at the market price. In this example, the buy price is 1.0092, the closing price for the candlestick at the bend. The stop loss is below the lowest candle at the bend. The market moved over 80 pips after this Bend trade was triggered (See Figure 14).

Naked Forex

Walter Peters, PhD

www.fxjake.com

Figure 14: The AUD/USD 4-hour chart illustrates the stop loss placement for the Bend trade. The stop loss is placed below the lowest candle for a buy trade (for sell trades the stop loss is placed above the highest high at the bend).

As with all of the naked setups in this book, you may use one of the exit strategies in Chapter 11 that suite your style. In this example the market offered over 100 pips, but a simple zone exit would have bagged 88 pips on this trade.

Optimizers for Bend Trades As with any trading system, you should first test it in Forex Tester to make sure that it is a system for you. Bend trades are simple to trade and easy to spot, so they are best for traders who are not interested in over-complicated trading. Bend trades are possibly the simplest of all naked trading strategies.

Naked Forex

Walter Peters, PhD

www.fxjake.com

However, not all Bend trades are equal. If you want to pick only the very best Bend trades, pay attention to the following during your testing: § Choose the Bend trade setups that precisely bounce off of a zone. The Bend trades that close beyond the zone are often poor setups, but the setups that precisely bounce off of the zone usually have a higher win rate. § Wait for Bend setups that explode through the zone before touching the zone again. § The best Bend setups have many candlesticks between touches. § Feel free to incorporate your own rules. The Bend trade is a powerful trade for the naked trader who is not interested in overthinking trading. It is a simple method for catching turning points in the markets. Back test the Bend trade to see if it is a trading system that fits your personality.

Click here to get the Naked Forex Book