No matter how careful or experienced a forex trader one may be, the whipsaw is always a clear and present danger. This is one event that can and will catch one off guard, literally knocking even the most able forex manager off his feet. While, every trader will be whipsawed a number of times during his trading career, there are ways to reduce the number of possible whipsaws one may suffer.
I’ve been ‘whipsawed,’ and quite a number of times to. However, as the years ticked by, I started to realize that there are certain scenarios when a whipsaw may strike and disciplined myself to steer clear away form them.
A whipsaw’ is a term used to describe a situation when the market moves defiantly against all logic. A trader may have placed an order expecting the market to go in a certain directions according to his calculations, when suddenly the market moves against him, taking him and his investment for a toss stopping out his trade and all within the hour too.
While most traders will retire disgruntled, cursing their luck and even perhaps blaming the broker for ‘keeping an eye’ on the trade and ‘fixing’ it to make him lose money, other seasoned trader, there for the long haul and to make a career of the profession, will learn from their mistakes, analyse and return only to be stronger, better prepared and will make more money in time.
Whipsaws occur unexpectedly and can cause great loss, however if one knows certain market conditions these events occur in, one can be prepared. Even though managing whipsaws cannot have a one-size-fits-all solution, one can minimize losses and not be wiped out in one blow.
Whipsaws usually and almost definitely occur, when the market ranges. This happens around holiday time such as Christmas, Thanksgiving, New Year etc, when volumes are low. Summers are the time when most whipsaws occur. This is because a lot of people are on vacation and volumes are very low. August is a particular month to watch out for. If you have to trade in summer don’t go with the daily trends, because the markets may look bullish one day and bearish the next. Go with a longer time frame. A week or month is better.
Always keep with the trend. This will reduce the chances of getting whipsawed. Keep a large margin of at least 200 pips. Whipsaws always return to the entry level after a few days if not a few hours.
Last but not the least, if you have been whipsawed you will be angry and frustrated, but don’t try to fight the market, you can’t get even, revenge is a killer especially where trading is concerned. If you have been stopped out, you will just have to wait it out. There will be other days to make some money. Remember, trade with a strategy that you stick to like glue. This includes having some indicators in place, entering the market when they indicate to do so, keeping a fixed lot size to trade, earning a fixed number of pips before you close the trade, keeping a fixed maximum number of pips before stepping out, and you will find that with a good strategy and some practice, you will begin to make more profitable trades than losing ones. The averages will have you smiling your way to the bank!