Originally published by AxiTrader
Recently I wrote a piece on the outlook for oil titled "WTI Crude Oil has to hold $42 or all heck could break loose". My aim was to highlight that this $42 dollar region looked, looks, crucial, on the WTI chart.
But in order to be able to garner some technical clarity in the outlook for oil, I didn't use my normal WTI chart - the one I look at each day when I'm writing and when I'm recording my video.
Rather, I wanted to see what WTI looked like naked. That is, just the daily and weekly price as represented by daily candles.
It was only after I'd done that and been able to look at WTI uncluttered of all my usual indicators, untroubled by previous trendlines or Fibonacci levels that I then added indicators back onto the chart.
In short, looking at the naked chart gave me clarity.
It's something I do all the time. Indeed on MT4 I have a profile I use every day my analysis where I draw lines and levels and then there is another profile which has all my charts naked, utterly uncluttered.
And it's something I know other traders do as well.
Writing for CNBC this week Daryl Guppy explained why he thinks traders need to look at naked charts for technical analysis.
"Over time our charts become cluttered with trend lines and other technical indicators. The problem is that these old lines tend to guide our thinking and analysis of the chart," he wrote.
And like me, he believes that "it is very useful every now and then to clear these lines from the chart and start with a naked chart, showing just the candlesticks and no other information".
He too used an oil chart in his piece and said looking at the naked candles meant "several features become more apparent. Some are negative and call for new thinking. Others are new relationships that also call for fresh views".
In the end, it's a personal choice.
But there is also a very good behavioural reason for looking at naked charts every now and again which can improve your trading.
Daniel Kahneman - one of the fathers of behavioural finance and economics - wrote about this in his book Thinking Fast and Slow. Kahneman said that if we want to overcome our biases, to become better forecasters (let's say traders) we need to avoid what he called the "inside view".
In layman's terms that's the view where we are influenced by a narrow set of inputs using the information that is close at hand. In the case of my WTI or other charts think established trendlines, levels and indicators.
You can see how the inside view can potentially constrict your thinking as a trader just by looking at this weekly chart of WTI.
Kind of messy right.
The outside view, on the other hand, essentially asks us to change our frame of reference, to see the problem more holistically, and with reference to a larger pool of inputs. And over a longer time frame.
In trading terms, the outside view is the naked chart. If nothing else you get more clarity at a high level even if, when you drill down, you end up in the same, or a similar, place.
Looking at naked charts is the kind of reality check that helps me make sure I don't fall down the rabbit hole and lose focus on what's really happening in markets I'm trading.
Have a great day's trading.