How To Manage Whipsaws In Your Trading


This article on Whipsaw Trading is the opinion of Optimus Futures.

Trading Whipsaws

It eventually happens to every trend-following trader, especially those implementing an always-in-the-market trading strategy. You enter the market anticipating a strong trend only to see it reverse unexpectedly.

You then switch from long to short, hoping to catch some momentum. But then the trend loses steam, reversing yet again.

By this time, you realize you may be in for a “sideways” market or stuck in a trading range. Every time the market’s direction reverses, a good chunk of your trading capital goes with it.

Enter the whipsaw trading environment where “death by a thousand stops” becomes a very palpable fear. This is because a quick erosion of your trading can happen rapidly if you’re ill-prepared for such a market.

Disclaimer: The placement of contingent orders such as a “stop-loss” or “stop-limit” order will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders. While stops may be an important component of risk management strategy they are not a guarantee that losses will not occur.

We’re going to explore the nature of a whipsaw environment.

How might you anticipate it?

What can you do to adapt to it?

What technical indicators might help you take advantage of such a market condition?

We’ll try to address all of these questions. But first, let’s start at the beginning and ask…

Whipsaws In Financial Markets: How to Recognize and Trade Them

A whipsaw in the financial market is when a financial asset moves abruptly in the opposite direction of a trader’s expectation.

In short, when a market indicates, based on your analysis that it will move in a given direction, but then reverses, indicating that its direction has changed. In most whipsaw environments, this type of motion will create a volatile back-and-forth movement that trends very little or not at all. Markets of this type are often said to be “range bound.”

In other words, it can go sideways over a small to a wide range, and this type of motion can continue for a lengthy period of time.

The term whipsaw comes from the push and pull action that lumberjacks use when cutting wood with the same saw – back and forth the saw goes within the same range of motion.

When the price of an asset in which a trader has recently invested or traded suddenly and unexpectedly moves in the opposite direction, the market is said to have “whipsawed” market participants who were looking for a trend  and may have taken a signal to enter the market (such as a breakout pattern).

In actuality, whipsaws tend to generate multiple fake-out moves and false breakout scenarios. But don’t be too surprised if you observe this, financial asset whipsawing is common. So, “whipsaw trading” is a common area of concern and skill set that must be developed by any modern financial trader.

Whipsaw markets, although not always, typically go hand-in-hand with increased volatility. So successfully trading through such a period requires significant pre-analysis, the right technical tools, and a few good strategies designed specifically for dealing with it.

There are two main types of whipsaws in financial markets

  • Bearish whipsaws: When a trader goes long, the price must suddenly fall in order for it to be considered a bearish whipsaw.
  • Bullish whipsaws: When a trader goes short, the price must suddenly rise for it to be considered a bullish whipsaw.

In Optimus’ opinion whipsaw types tend to originate from one or a few fundamental drivers. Here are just a few.

Potential causes for whipsaws in the financial markets

There are numerous causes of whipsaws in financial markets; here are a few of the most important we typically see at Optimus:

  • Monetary policy decisions or discussions
  • Earnings season
  • Unusual sector news or activity
  • Technical considerations
  • Other fundamental factors or news

Many factors can cause whipsaw environments. They’re often unpredictable.

The main point here is not to try to predict them but to be aware of the larger fundamental context that may cause them to happen. It is also critical to identify a whipsaw environment as quickly as possible and have a strategy for how to manage it.

Is it possible to recognize whipsaws before they happen?

Because whipsaw movements are unexpected, there are no hard and fast rules for identifying them as they emerge. They’re not unlike trends whose emergence can’t truly be identified until you’re looking backwards.

But, you can prepare for them once they do emerge. Here are a few pointers:

Use of indicators:

You can use certain indicators and oscillators in an effort to predict the likelihood of whipsaws in a given market environment.

Volume, RSI divergence, stochastic RSI, Envelope, and parabolic SAR are among the recommended indicators for scalpers, day traders, and swing traders.

Remember that each indicator and oscillator provides a particular market angle and that you may have to view a given instrument from multiple angles.

In other words, this is more art than science, and improving your skill in anticipating whipsaw conditions is a matter of experience overall.

Checking Correlated Assets:

The second approach is to investigate the asset over a longer period. If the trend becomes erratic, that asset has a high risk of whipsawing.

Try to use candlestick patterns and observance of past movements and market behavior.

Also, you may want to pay close attention to correlated assets.

For instance, if you are going to trade the Dow Jones futures (YM, MYM), you should be aware of the price action of the broader S&P 500 (ES, MES) before deciding whether to open a position in the Dow futures or not, because it often correlates with the broader market.

Stay up to date:

To avoid whipsaws, conduct research and stay current with the financial market in which you are trading. For instance, you should be aware of federal reports/meetings and their announcement, the expiration of CME Options, earnings season, and other main events related to a product or ecosystem.

This is because fundamentals can play a significant role in short-term high volatility.

How to trade and manage (or simply survive) whipsaws

Because whipsaw movements are unexpected, there are no hard and fast rules for dealing with them in a volatile market.

Whipsaw trading in financial products frequently results in trading losses. However, the goal is to keep losses to a minimum by avoiding large losses during whipsaw periods.

Strategies based on indicators:

The best way to deal with whipsaws in scalping or day trading is to use a stop loss with a high R/R plan. Create your own scalping strategy and run it with price action and indicators. Keep in mind, per the disclosure above, that stop losses cannot guarantee you will be able to limit losses or exit the market at the predetermined stop loss order entry point. Stops are only one tool in attempting to manage whipsaws.

For instance, day traders and scalpers may consider using 4EMAs (50,100,150,200), Stochastic RSI (K=14,D=5), Supertrend (9, 3), RSI (13) and Bollinger band are recommended indicators ( 3,5,10,15 & 30 Minute ).

The 4EMA (8,13, 22, 55), MA & EMA Cross (20,50), and stochastic RSI would be useful for swing traders (4h and day TF).

Stop loss and position sizing:

Traders should know the goal of the target point with strict position sizing when shorting or going long in scalp and swing setups. We can use ATR in conjunction with the trading view long position tool to calculate and set reliable stop-losses.

Alternatively, we can use an auto calculator to set the position size based on our own R/R. A risk-to-reward ratio of 1.1 to 1.5 is recommended for day traders and scalpers.

Trading plan with portfolio diversification:

Anyone serious about the financial markets should create a clear trading plan. Constantly staring at and second-guessing a financial asset will lead to mental and physical strain.

That is why it is important to develop a trading strategy and stick to it within the time frame specified.

Diversifying one’s portfolio will also increase one’s chances of success when trading and investing. For instance, we can divide our portfolio into three parts.

One for long-term investment, swing trade setups, and scalping and day trading setups.

Reap the rewards of fundamentals:

It has been observed in the past, and it is also clear that financial assets can rise and fall based on fundamentals for a shorter period. So fundamentals can function as another level of whipsaw activity, and we can gain maximum advantage from it.

Try to stay focused on ecosystem fundamentals and news and take advantage of short-term volatility price action.

For example, a single tweet can cause wide asset fluctuations. It is your decision whether you want to risk trying to take advantage of such action.

The bottom line

Whipsaws are tough, often unpredictable, and dangerous, especially if you’re not careful.

Sometimes it’s wiser to stay away, while at other times, it may provide an opportunity for returns depending upon the then prevailing market conditions. Managing whipsaw market environments well really depends on your strategy, personality, and level of experience. Good luck and be sure to manage your risk in this type of market!

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. 

Start the discussion at