What Is a Whipsaw, and How Can One Trade It? for FXOPEN:EURUSD by FXOpen
Overbought stocks may witness an abrupt decline in prices and vice versa. To avoid whipsaw, be cautious while taking long positions in overbought stocks and short positions in oversold securities. Whipsaws can be frustrating for traders, as they can result in losses and missed opportunities.
Swing traders use momentum indicators to ride momentum over a period of a few weeks. Whipsaw can hurt swing traders when they enter into a position at a bad time and the stock immediately whipsaws against them. One way to identify if a stock is overbought or oversold is with the Relative Strength Index (RSI) technical indicator.
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The market jolts quickly in both directions, leaving even experienced traders confused. A correct and in-depth reading of the technical and fundamental indicators can help you predict a potential whipsaw pattern in advance and trade accordingly. However, no strategy is foolproof against whipsaw in stock markets as whipsaw patterns are an abrupt development.