A “pip” is a percentage in point. One pip is equal to 1/100th of 1 percent. It has traditionally marked the smallest move a forex pair can make. Forex traders track trades in terms of pips. However, many brokers are now using “pipettes”—these are 1/1000th of 1 percent units.
The EUR/USD 1-hour chart shows the stochastic falling below 30 on the stochastic. A few hours later, the stochastic crosses upward and rises above 30, a clear buy signal. The stochastic is moving up, so price should follow. However, the market then falls a further 90 pips. For most traders this trade would be a big loser. What about the naked trader? In this instance, the naked trader gets a very clear buy signal after the stochastic buy signal (see Figure 2.6).
What happens after the naked trading signal? The market jumps more than 40 pips immediately. The naked trader avoids many losing trades by waiting for a price action signal and quickly finds profits. Not all naked trades are winners, of course, but this trade is an example of how the naked trader is able to avoid some of the very common indicator-based mistakes
because the naked trader uses the price action of the market to determine entry signals.
Notice how the naked trader avoids the drawdown with this trade signal. The market immediately moves in the expected direction, upward, after the signal. Contrast this entry to the stochastic entry signal. The characteristic indicator lag associated with the stochastic means that the stochastic trader not only enters a losing trade, but immediately after the stochastic signal the market trades in the wrong direction, and the trade enters into a protracted drawdown. In fact, it is unlikely that the stochastic trader ever had profit on this trade. Naked-trading strategies enable the trader to enter a trade based on current market price action, and often avoid the severe drawdowns associated with indicator-based trading.
Most traders believe severe drawdowns are a part of trading. This is simply not true. Severe drawdowns are characteristic of mistimed entry signals, and most traders use indicators to find entry signals, so most traders mistime entries.