What Is a Whipsaw, and How Can One Trade It? Market Pulse

The main benchmarks eventually settled higher thanks to impressive earnings from another notable technology company. Whipsaw describes a rapid movement of price in one direction followed immediately by a sharp movement in the opposite direction. On the other hand, when thе price breaks through a key level of support or resistance and commеncеs some movement in thе nеw direction bеforе reversing, this can be defined as a false breakout. Supposе, in thе forеx markеt, thе Singaporе dollar sharply risеs against favourablе еconomic nеws vеrsus thе US dollar. In such a case, tradеrs may opеn long positions in anticipation of thе currеncy continuing highеr.

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Ironically, most buy & hold investors are really just very de-sensitized tactical investors, because they do eventually sell near market lows when the pain of further losses is far more than they can tolerate! Very few have the estimating the positioning of trend followers ability to always implement the “hold” portion of buy & hold, and we don’t think it is a good plan for most investors with serious money at stake. We think it is better to accept the whipsaws and avoid the devastation of bear markets. We hate them, our clients hate them, and people quit using investing strategies because of them.

Identifying a Whipsaw

For example, a stock may whipsaw during an earnings announcement or other market moving event. This can execute stop-loss orders that close out positions, even as the stock subsequently rebounds. During a whipsaw, the stock price experiences a rapid and sharp change in direction, often in a short period. It can lead to significant price volatility, making it challenging for investors to predict the stock’s next move accurately. This sudden shift can result in a cascade of buying or selling, amplifying market turbulence and causing wild swings in price. Understanding whipsaws is crucial for traders because these patterns can occur across various timeframes, from intraday charts to weekly or monthly ones.

Those who have a long-term, buy and hold approach to investing can often ride out the volatility of the market and emerge with positive gains. It is a rapid movement that bounces the traders, expecting best online brokers for bitcoin trading for 2020 continuity from the first trend. The term whipsaw is used as a “play on words,” describing the motion of a saw while cutting, yet going in and out and napping the trade. Whipsaw patterns most notably occur in a volatile market in which price fluctuations are unpredictable.

Emotional Trading

“Those expecting the labor market to crack are going to have to keep waiting,” says Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management. “Another moderate jobless claims total underscores the U.S. economy’s persistent strength. But as the Fed has recently hinted, that strength may slow the pace at which they cut rates.” On the economic front, data from the Labor Department showed that initial jobless claims fell by 6,000 last week to 213,000.

1. This phenomenon can be highly frustrating and costly for traders, particularly those who employ trend-following strategies, as it makes it difficult to analyse market trends.
2. The risks of loss from investing in CFDs can be substantial and the value of your investments may fluctuate.
3. While whipsaws can be unpredictable and create volatility in the market, astute investors can leverage these situations to identify opportunities for profit.
4. This pattern can mislead traders and often leads to significant losses if not managed properly.
5. We caution against this approach to whipsaws as it may reduce the frequency of them, but can also reduce overall performance, especially during bear markets.

Whipsaws are an inevitable consequence of eschewing the buy and hold approach that will eventually cause you to become a victim of a bear market. Whipsaws are the “cost of doing business” if you want to avoid the devastation that comes during bear markets. We know this fact to be true, watching the market plummet from the sidelines is not a bad thing, emotionally or financially. We never know if a few down days are going to turn into a correction, or if a correction is going to turn into a bear market. No one can reliably predict such things (even though countless people try), but at least we are always prepared for the worst outcome. That is why we accept whipsaw trades in our trend following approach – for the benefit of the downside protection our selling rules provide.

Whipsaw can hurt swing traders when they enter into a position at a bad time and the stock immediately whipsaws against them. If a trader opens a position because an indicator showed one thing and the indicator foreign exchange rates immediately changes to show a sell signal, the trader was whipsawed. Traders use stop losses to protect themselves so that their broker will automatically sell a stock if it drops below a certain amount. This limits big losses, but in the case of whipsaw where the stock quickly decreases but then returns to an uptrend, it sells a position the trader may have otherwise held to. The second type of whipsaw is when you are defensive and move to being invested (i.e., buying) and the market moves down after you enter, forcing you to sell at a lower price.

Whipsaws are challenging yet common patterns in volatile markets, characterised by sharp price movements and sudden reversals. Understanding their causes, identifying their characteristics, and employing strategic approaches can help traders navigate these turbulent conditions. Open an FXOpen account to access advanced trading tools and resources that might enhance your trading strategies and help you navigate market volatility with confidence.