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Caught up in a Whipsaw Whirlwind

whipsaw chart pattern

Part 1 in our series detailing market tricks and deceits

Traders and non traders alike all know that the market is a hard puzzle to solve. It’s a tricky enigma because it never goes in a simplistic up and down pattern. Though when you step back and take a big picture view, you will see prices going up and down. From a distance, it certainly looks 2 dimensional and it would seem you just have bet on whether it will go up or down. However, the reality is that the market is multidimensional and there is much more at play than just a seesaw like up or down.

Many newbie traders fail because they’re taught to see the market in the unrealistic, simplistic way. Far from straightforward, the market is devious and plays tricks on all of us. Even if you bet that it will go up and down at the same time, you could still end up losing both trades. It may sound counterintuitive and completely unrealistic, but realities in the markets are far more complex than they appears. Understanding the deceptions it can present to you is essential to understanding what the market is all about.

Imagine for a moment a room full of people standing together on one large carpet. Suddenly, someone else enters the room and starts violently shaking the carpet. In response, everyone falls to the fall amidst the turbulence. If you can visualize this, you’re a step closer to understanding how volatility in the market works and in particular, the whipsaw pattern.

Whipsaw Patterns in Action

If you imagine such destructive market behavior on a chart, let’s say, that a price broke a new level and hit a new high. As it goes higher, it will bring more traders to buy. This rush makes the impression that the price is continuing to rise when suddenly it starts to go down. This switch tends to be a false breakout but it will not adjust, instead, it keeps going lower and lower. All of the people who took loans will see the market break to lower levels. There’s a good chance they’ll sell their positions in the loss with the impression the market is now going lower. From here they’ll take a short position. And just like that, the market goes up and breaks again. People now close their short position but get their buy position. Then the market does it again on the short side. Once in a while, price will respect a predefined position but then suddenly the price will break again.

whipsaw pattern in action

But wait! Now the market flips and does the opposite. In this scenario, it takes everyones stop loss from all directions. When you’re involved in the whipsaw situation, whatever you take can be on the losing side. These tricks can happen in a low time frame – like 1 minute, 15 minutes, 1 hour but can also happen in a daily chart or a weekly time period. You have to realize that at situation where the market is basing a higher time frame bigger picture key level, price will do these tricks on you.

If these last two paragraphs confused you, don’t worry, you’re not alone. Save room for more though because this is just a small taste of how the indecisiveness of the market can leave investors old and new immensely confused.

Making Sense of the Confusion

What is actually happening on these key levels are the clashes between the traders with the motivation to continue and rally, against the traders with less motivation to stick it out. These clashes are the meeting of orders injected into the market from both sides. Often in these scenarios, the orders are injected in a very experimental way.

The opposing sides of the clash will send more and more orders to gauge how the market receives them. When they see their opponents side win and they’re invested in the opposite, they will try to hit harder from their position and vice versa. This causes the market to change direction after a fakeout. All these clashes between big players causes these effects that make prices go up and down. Eventually one side will win but during the period of clashes, it’s an extremely volatile whipsaw event that small time traders will be caught in between and potentially wiped out.

As regular traders who have no market power to affect prices, what can we do? What should we look at in order to save ourselves from being wiped out in this clash of titans?

Bracing for the Whipsaw and Coming Out On Top

The most basic thing to survive this event and so many others in turbulent market times is to trust your analysis and also rely on a multiple timeframe analysis. This means your analysis and trading decision of what the bias of the asset should be, should rely on a confluence of many timeframes charted in analysis. If you see that a short time analysis calls for long but a long term analysis calls for short, you would be presented with a non-decisive bigger picture. You must combine all the views you get from different resolutions of the market in order to complete your view of the landscape. If you get a confluence of a few timeframes around the time you want to act, the combination of all the stories will tell you the complete tale you need to see and help you not fall for the tricks of the whipsaw event.

If you do enter and find yourself caught in the whipsaw, it’s possible to move your stop loss to a safer, more distant place and allow yourself a margin for the payout before the market resolves itself in one direction. If your multiple timeframe analysis tells you the same story, the probability is further on your side and you might be able to resolve your tricky situation via the analysis you made.

Another thing to do in order to pass safely through the whipsaw event is to stay calm and confident in your multi timeframe analysis. All you have to do is keep your position and not get caught with your stops too close to the event. Leave room for fluctuations but remember that it’s a risky event and we don’t really recommend that you move your stop loss to a very distant area. However, knowing the characteristics of a whipsaw, we know that these events tend to expand their range on the lower side and on the upper side. It’s hard to admit, but this realistic market event will probably force you to take higher risk and expand on the the risk you’re already willing to take.

A final way to survive the event is something you should really always be doing, and that is to be vigilantly attentive. This is the worst possible time for set and forget strategies. This is the time that you should maintain your position and continue to re-evaluate the market. You need to absorb more market hints as they appear. This will however be confusing and tiring because you’re in the midst of an unresolved clash. There’s no good way to determine which side will win but try to rely on your multiframe analysis, try to gain as much confluence all the time, and keep redoing your analysis and checking if things are changing.

As a Last Resort, Just Get Out

Finally, bailing at a break even when you realize you’re in a whipsaw event is an entirely reasonable course of action. Knowing it will take time to resolve, if you don’t want to be tired and worn out by monitoring and attending to your trades, you can put your TP on a break even position and try to bail out as soon as possible. If you’re not mentally built to wait and manage this chaotic event, you’re better off bailing and waiting for a different opportunity. The bottom line is, don’t be caught in a whipsaw event if you can’t hold on and survive the storm. It’s a rough one but if you can see through the eye of the storm, there’s not much that can defeat you.

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