What is a whipsaw?
This is where you purchase based on a moving average crossing (or some other signal) and then the price moves in the other direction giving a sell signal shortly thereafter, frequently with a loss. Whipsaws can substantially increase your commissions for stocks and excessive mutual fund switching may be prohibited by the fund manager. • Why a 200 day moving average as opposed to 190 or 210? Moving averages are chosen as a compromise between being too late to catch much move after a change in trend, and getting whipsawed. The shorter the moving average, the more fluctuations it has. There are considerations regarding cyclic stock patterns and which of those are filtered out by the moving average filter. A discussion of filters is far beyond the scope of this FAQ. See Hurst’s book on stock transactions for some discussion. • Explain support and resistance levels, and how to use them. Suppose a stock drops to a price, say 35, and rebounds. And that this happens a few more times. Then 35 i
A whipsaw is a type of crosscut saw which is designed to be utilized by two people. Crosscut saws have special teeth which are engineered to make horizontal cuts, such as the cut required to fell a tree safely. For certain applications, crosscut saws are safer, especially when they are used by experienced operators. Some hardware stores stock whipsaws, and they can also be obtained from timber supply companies. You have probably seen a picture of a whipsaw; it’s the classic long, thin blade with two handles which was used historically by lumberjacks. Once lumberjacks selected a tree to cut down, they would prepare the tree and the surrounding area and then get to work with the whipsaw, with the men standing on either side of the tree and moving the saw in a back and forth motion. Using a whipsaw successfully does require some skill, and coordination with your partner. A well-trained and experienced team can establish a smooth rhythm which accomplishes felling tasks quickly and safely.
A Whipsaw happens when both your entry order and your stop loss exit order are filled in the same session, effectively stopping you out for a loss. First the market goes one way then rapidly changes direction and stops you out. Low volume or liquidity is another reason that whipsaw trades are more likely to occur during the summer, especially late August, because a lot of futures traders are away on their summer vacation. Their absence means less liquidity which can result in larger trading ranges and an increase in whipsaw trades. The markets are particularly susceptible to whipsaw trades during the summer when many of the commodity markets being crop markets are extremely sensitive to any changes in weather or crop conditions, and will react extremely fast to changes. These rapid reversals have the potential to whipsaw you out of what otherwise seems to be a good trade. How Do You Avoid Whipsaw Trades? How can the average small commodity trader avoid getting whipsawed out of a trade?
