Monday, April 9, 2012

Nekritin and Peters, Naked Forex

Naked Forex: High-Probability Techniques for Trading without Indicators by Alex Nekritin and Walter Peters (Wiley, 2012) is not so much about forex as it is about trading naked. The authors explain how to trade price action, especially around support and resistance areas.

In a book targeted at relatively new traders, Nekritin and Peters begin by describing the process of gaining confidence in a trading system—back-testing. For discretionary traders, back-testing is a time-consuming process since it is best done manually, with no cheating (which introduces hindsight bias) allowed.

Well, that assumes that you have a system, which presumably you don’t if you are reading this book. So the authors get into the meat and potatoes (and beer) of the book—how to find good setups.

Support and resistance zones are critical for the naked trader. They are analogous to beer bellies: “they are squishy, they are fat, and they consist of a wide range on the chart.” (p. 66) Just as at some point you will meet with resistance if you push into a beer belly with your fist, so too price will often push into (and sometimes beyond, which strains the analogy) a zone, only to turn around.

Once price reaches one of these zones, the trader should be on the lookout for price pattern catalysts that are high-probability setups. The authors spend six chapters detailing such patterns—most of them familiar but without such jazzy names—as the last kiss, the big shadow, whammies and moolahs, kangaroo tails, the big belt, and the trendy kangaroo. For instance, the moolah “is simply a double top on an important support-and-resistance zone.” (p. 127) I should note that not all of these setups are reversal patterns. The last kiss, for example, is designed to help the breakout trader avoid fake-outs.

Exiting a trade gracefully is always a difficult enterprise. The authors suggest that you have to decide whether you are a runner or a gunner—that is, whether you are a trend trader or a scalper. Once you’ve made the decision, you should stick to that exit philosophy.

The final part of the book deals very broadly with trading psychology, including risk management.

Although the authors do have products to sell, their pitch is subtle and does not interfere with the flow of the book.

Naked Forex is actually a much better book than it may appear from my summary. The dominant theme is to find strategies that are simple yet powerful, strategies that you the presumably not yet profitable trader can feel comfortable with. I can think of many worse places to start reading about how to trade. As I indicated earlier, it’s not just for the forex trader.

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