You have to pay close attention to one thing on the chart if you trade
naked: price. Price is king. Price will tell you all you need to know.
The wonderful thing that all markets have is this: a history. The market will tell you where the sweet spot is on the chart. These sweet spots
will be the foundation for everything you do as a naked trader.
A sweet spot on the chart is a support and resistance zone. You may
be familiar with the concept of support and resistance, however, support
and resistance zones are different from what many traders characterize
as support and resistance. I will call these support and resistance zones
by one word— zones. The eight important characteristics of zones are as
follows:
1. Zones are an area, not a price point.
2. Zones are like fine wine; they get better with age.
3. Zones are spots on the chart where price reverses, repeatedly.
4. Zones may be extreme highs or lows on the chart.
5. Zones are where naked traders find trading opportunities.
6. Support and resistance zones rarely need to be modified.
7. Line charts help naked traders find zones.
8. Zones are often seen by many traders.
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40 NAKED FOREX
You may want to take a closer look at each of these eight characteristics. It is incredibly important that you understand how to draw zones, why
you should draw zones on your charts, and understand when these zones
become critical for your trading.
ZONES ARE BIG FAT BEER BELLIES
A zone is simply a big fat beer belly. Many traders have misconceptions
concerning zones. Traders may be familiar with the concept of support and
resistance but unfortunately, many misapply this concept to technical trading. The naked trader understands that zones are an area on the chart. This
is a very distinct concept to a support and resistance line. A support and
resistance line indicates a specific price on the chart, but zones are something different. Zones are not a specific price. These zones are, instead, an
area, a range, or, as I prefer, a beer belly.
Let me explain. I prefer to think of these zones on the chart as if they
were beer bellies. Before you disregard this idea, consider what a beer belly
is: A beer belly is somewhat firm, maybe somewhat repulsive, and has some
predictable characteristics. My friend Jason has a beer belly. He is quite
proud of it; he tells me it is quite expensive, as he has paid good money
for the wine and beer that have enabled him to grow this belly. If I were to
push into Jason’s beer belly with my fist (I would never push into a beer
belly without permission, and I suggest you, too, first obtain permission
before pushing any beer bellies), eventually I would find resistance. Even
if at first I did not find resistance, eventually there would be a point at
which the squishy beer belly would stop me from pushing further. This is a
critical characteristic, for I know that I may be able to push a little bit into
the beer belly, but eventually the beer belly will offer some resistance.
Perhaps you may also decide to push into Jason’s beer belly with your
fist. You may have a different experience. Perhaps, when you start to push
into Jason’s beer belly, you become somewhat unsettled and decide to pull
back after only slightly brushing the hair covering his beer belly. This is
completely reasonable, and I am sure that many others will have the same
reaction. However, the important thing to note here is that you and I are
pushing into the same beer belly, Jason’s beer belly, but we find resistance
at different spots on the beer belly.
This is a significant feature of zones. Zones are just like beer bellies.
Zones are spots on the chart where price has pushed and probed, and then
reversed. Naked traders love beer bellies. They love these zones. Naked
traders wait for price to reach these zones before initiating a trade. The
zone is the sweet spot on the chart for the naked trader. It is absolutely
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Identifying Support and Resistance Zones 41
critical that the naked trader identifies the zones on the chart. These zones
are the foundation of naked trading.
OLD ZONES, NEW ZONES
The age of zones, and the importance of the age of a zone, is a hotly debated topic among traders. Some traders believe that only those zones that
have been established recently are important, and other traders believe
that zones that were established long ago are just as important as the newly
minted zones. I believe that zones are recycled.
If you take a look at any chart for any currency, you will find historical
price levels. What you will notice is that price has a tendency to reverse at
the same levels repeatedly. This is a distinguishing trait of zones, and you
may use this characteristic to define and discover zones on your currency
charts.
Hot Pizza and Zones
When I was a young child, at about six, I used to watch my mother in
the kitchen. It was fun. In fact, some of my very first memories are of my
mother singing to me in the kitchen. One day, while in the kitchen, I had a
terrible accident. On this day my mother was baking pizza, and it smelled
delicious. In fact, you may find it hard to believe, but to this day I still love
pizza. My mother was busy chopping up the ingredients for the pizza, making the sauce, because she had several pizzas to make. I wandered over
to the first pizza. It was still on a hot pan because it had only just been
removed from the oven.
Now, my mother had warned me to be wary of the hot pizza pan. I had
either forgotten or disregarded her warning, and I decided to grab the pizza
pan because the pizza smelled so good. As you may imagine, I completely
burned my hand. I still remember it being extremely painful and still have
the scars.
I learned a lesson that day. I still love pizza, but I am wary of hot pans.
It was a valuable lesson I learned, and is something that I think about every
time I look at a currency pair on the chart, I think about that pizza day.
Every time I see a chart approaching a zone, I consider that the market
may remember the last time it was burnt at that price level, at that zone.
Do Zones = Market Scars?
HOW TO FIND ZONES
Zones are those spots on the chart where price has repeatedly reversed.
However, it may be difficult at first for you to find these zones on the chart.
There are several sneaky shortcuts that you can use to help develop an eye
for finding zones. Some zones are extremely obvious and easy to find. Other
zones are a little bit trickier and may be difficult for you to identify if you
have not had experience finding zones on the chart. Please keep in mind
these three shortcuts when you are drawing your zones on the chart.
1. Start with a higher timeframe chart.
2. Use a line chart to find the zones on the chart.
3. Ignore minor zones.
Use a Higher Timeframe Chart
Question: When you meet someone new, how do you decide what they
are like? You learn their history, you ask people about them, you try and
decipher what they have done in the past, in the hopes of understanding
them better. Why do you do this? The implicit assumption is that they will
do the same things they have done in the past in the future. Markets are
no different. When the market is on a runaway uptrend, traders look to the
older charts to see where the critical zones are on the chart. This is also
where we see history repeat itself, over and over and over again.
This shortcut for finding zones on the chart will work regardless of
the timeframe you are trading. Simply move up one timeframe. This is a
very powerful method for finding the most important zones on the chart.
Examining the higher timeframe chart will enable you to identify zones that
will be the most critical areas on the chart for the timeframe you choose
to trade. A few touches on the higher timeframe chart will translate into
many touches on the lower timeframe chart. This technique will work on
any timeframe chart.
Take a look at Figure 4.7, the GBP/USD one-hour chart. This pair has
made an extreme low at the 1.6291 level. This touch at 1.6291 suggests the
market has made a significant low, and this level may become important
later. You may recall that extreme touches (lows or highs) are also critical zones. Although most zones will have touches from above and below
(support and resistance touches), touches at extreme levels are also very
critical, such as the extreme low in Figure 4.7. Later, the market will often
come back to these extreme levels.
A month later, the GBP/USD four-hour chart (Figure 4.8) suggests two
very interesting conclusions. First, the market has indeed found support
and resistance on the 1.6291 level; the market has a memory. Second, the
four-hour chart shows a very clear perspective for this market.
Moving up to a higher timeframe is an excellent way to gain perspective. Only the most important zones will become evident on a highertimeframe chart. If you are using Meta TraderTM for your charts, you will
have the following time frames available: one minute, five minutes, 15 minutes, 30 minutes, one hour, four hours, daily, weekly, and monthly. Thus,
if you are trading the one-hour chart, a move up to the four-hour chart will
help to identify the critical zones. The GBP/USD zone at 1.6291 is clearly a
critical zone, as the market touches this zone more than six times over the
course of one month (Figure 4.8).
This brings up an important point about zones. The importance of a
zone is directly related to the number of touches on that zone. So, for instance, if a daily chart shows a zone with five touches over the past year,
this would indicate a very critical zone on that particular chart
