, you may not know where to find your zones (see Figure 4.21
). If you are having difficulty identifying the zones on your chart, the easiest solution is to simply load a line chart.FIGURE 4.21 This is the daily USD/CHF chart. Do you see a zone on this chart?[You must be registered and logged in to see this image.]
The line chart will show all the zones, because the zones will be identified by the bends in the line (see Figure 4.22.
)FIGURE 4.22 This is the USD/CHF daily line chart. The obvious zone at 1.2685 is now apparent.The market repeatedly finds both support and resistance on the zone.[You must be registered and logged in to see this image.]
At each spot where you see repeat bends in the line, you are probably looking at a zone.
Second, you may have too many zones drawn on your chart (see Figure 4.23
).FIGURE 4.23 Too many zones are identified on this daily USD/CAD chart. The market touches a zone nearly every day on this chart because several minor zones are marked on this chart.[You must be registered and logged in to see this image.]If you have
too many zones drawn your chart, then you will probably experience two likely problems. The first problem is that you will notice many trade opportunities. If you are trading the daily chart and notice that you have a trade nearly every day, you probably have too many zones drawn on your chart. The zones should be more or less evenly spread out, and it may take some time for the market to reach these zones,and trigger a trade. Patience is important for the naked trader. Zones are critical areas on the chart, and price does not always reach these critical areas—zones—every day. The second problem that you will likely have is that you will notice many trades end up being losers.This is because
the zones on your chart are not solid zones; perhaps there are minor zones identified on your chart. It is important for you to draw critical zones only,those spots in the chart where price has repeatedly reversed. By only identifying those zones on the chart where price has repeatedly reversed, the odds are in your favor. It is nearly always better to err on the side of caution.
To do this, simply draw fewer zones (see Figure 4.24
). FIGURE 4.24 This is the USD/CAD daily chart again, with only the major zones identified. Notice how the market does not touch a zone every day.[You must be registered and logged in to see this image.]If you mark only
those zones on your chart where price has repeatedly reversed, you will avoid identifying the minor zones. You may miss out on some trades,but the trades you do make should be great opportunities.The third common problem you may incur when dealing with zones is this: It often becomes very difficult to determine precisely where a zone should be drawn. This is the nature of the zone.
The zone is squishy, it is fat,it identifies an area on the chart, and not a specific point (see Figure 4.25).FIGURE 4.25 The daily CHF/JPY chart has a clear zone at 89.35; the market has found resistance at or near this zone on several occasions. Notice how some of the valid zone touches are a deep into the zone and others are near the zone.[You must be registered and logged in to see this image.]Remember that
you do have some leeway in drawing your zone. It is not essential to nail down the zone to a specific price point on your chart, but rather it is important that you identify the area on the chart where you will look for a reversal. The touches on the zone will not be perfect. Some touches will come close to the zone, other touches will extend deep into the zone.Notice how the 89.35 zone
in Figure 4.25
has provided resistance for the daily CHF/JPY trade on several occasions. The market has fallen after reaching this zone each time, but the first two touches extended deep into the zone, and the third touch came near the zone. This is very common with zones; sometimes the market will brush against the beer belly and at other times the market will push into the beer belly.The fourth problem
that many traders come up against when drawing zones is that the market seems to disregard zones. When this occurs, our trusty friend the line chart can often come to the rescue. The easiest way to illustrate this issue is to take a look at an example.Take a look
at this chart in Figure 4.26
, and you will notice that it appears as though the market is not respecting the area at 81.83, where a zone could be drawn on the chart.FIGURE 4.26 The one-hour AUD/JPY chart has several clean reversals around the 81.83 zone; however, there are several sloppy touches marked with arrows. The market does not appear to respect the zone during these touches.[You must be registered and logged in to see this image.]FIGURE 4.27 The line chart clears up the confusing price action around the 81.83 area on the AUD/JPY one-hour chart. The line chart indicates that the market found resistance twice and support once on the 81.83 zone, so it is a well-placed zone.[You must be registered and logged in to see this image.]However,
the same chart viewed as a line chart (see Figure 4.27
) shows the important touches as bends in the line chart, and it is obvious that the market has respected this zone.The fifth problem that you may come up against when trading with zones is this: If the market trades beyond the zone it does not mean that the market has broken the zone. This is an important and critical point for the naked trader. Remember zone
s are beer bellies, they are squishy, they are fat, and they consist of a wide range on the chart. This means that sometimes the market will push into the zone, and it may look like the market has broken beyond the zone, this is often not the case. FIGURE 4.28 The NZD/CHF daily chart shows at least five touches on the 0.7590 zone; some touches go beyond the zone, others are just below the zone.[You must be registered and logged in to see this image.]Take a look
at the daily NZD/CHF chart in Figure 4.28
, the market finds resistance at the 0.7590 zone at least five times between November 2009 and March 2010.The NZD/CHF chart from November 2009 to March 2010 shows a clearly defined zone at 0.7590, the market finds resistance at this level on at least five occasions.From left to right,
there are at least five touches on the 0.7590 zone. The first touch is a near miss; the price came very close to 0.7590
, but ultimately found resistance just below this price. The remaining touches are a bit beyond the zone, but each are valid touches on the zone. The second touch
includes three daily candlesticks in succession; each day the market pushes a bit beyond the 0.7590 zone. Ultimately, the market closes below the zone, and after the third daily candlestick falls, the market trades lower once again. The third touch occurs
five days later and includes a piercing kangaroo tail candlestick (see chapter 8 for more on the kangaroo tail), clearly the market has traded beyond the 0.7590 zone, but the market is unable to close above the zone, and it falls down after this touch. The fourth touch is made up of two candlesticks, the first on the 0.7590 zone and the second pushes a bit further beyond the zone, but it is still a valid touch. (There is another near miss after this touch, not marked on Figure 4.28, but the market does come very close to the 0.7590 zone.
) The fifth and final touch again penetrates the zone before falling sharply; notice how the market was once again unable to close on the other side of the zone. At times, the market may touch a zone and then close briefly beyond the zone before moving back, but most of the time if the market touches a zone, it may trade beyond the zone, but it will not close beyond the zone.Have a look
at some charts. You will notice how price will often push into and beyond a zone, only to eventually turn around. This is a common behavior. It is also the reason why most naked traders find it much easier to trade reversal set-ups than breakouts. Reversal set-ups are based on the market turning around at a zone, and breakouts are based on the market trading beyond a zone. Perhaps
you are similar to most traders in that you find it a very tricky proposition to determine when the market has made a breakout and traded beyond a zone. If this describes your experience, you may consider avoiding breakout trades and focusing on reversal trades.The easiest
and safest way to trade breakouts is : The Last-Kiss
. If you are interested in breakout trading, the last kiss may be the trade for you.Once you begin to closely attend to the clues in the market, your trading will become more consistent. Once the market reaches a zone, the naked trader watches carefully, and if a catalyst appears, a trade is triggered. The key to successful trading is to wait for the very best trading opportunities. These opportunities
occur when the market reaches a well-defined zone and then prints a catalyst. These are golden opportunities.The next section is all about trading catalysts, how to identify them and specific rules for trading each of the high probability, naked-trading set-ups