MACD Whipsaw Fake-outs and Fake Out Signals on Bearish & Bullish Territory

Since the MACD indicator is a leading indicator that sometimes generates fake outs, we shall look at an example of a whipsaw fakeout generated by this MACD, so that to show why it's always good to chill and wait for a confirmation signal.

MACD Indicator Whipsaw - Stock Index Fake-outs

The MACD indicator gave a buy signal, when this buy signal was generated and the MACD indicator line was still below zero center line mark. At this point the buy signal had not been confirmed and it resulted into a whipsaw as illustrated by the moving averages which continued to move downwards.

A Index whipsaw signal is as a result of dramatic rise and fall in the price in a short time and in such a manner that skews the data used in calculating the moving averages that plot the MACD indicator data. These types of fake out moves are usually brought about due to and because of some news announcement that can produce market noise.

Stock Index traders should have the ability to gauge a Index whipsaw & withstand the whipsaw; a Index whipsaw might result into an upswing session and then a downswing session. To minimize the risk of trading Index whipsaws, it's good to wait out for confirmation of trading signals by waiting for MACD to cross above/below zero center-line mark.

Combining MACD Crossover with Center-Line Crossover to Prevent Index Whipsaws

Buy signal - When there is a crossover, followed by a steep rise in price and then a center-line crossover the buy signal gets to be confirmed.

Sell signal - When there is a crossover, followed by a steep decline in price and then a center-line crossover the sell signal gets to be confirmed.

1. Buy Signal in Bearish Region Whipsaw

When a buy signal is generated/derived in bearish territory, it may result into a fake out especially if it isn't followed soon by a MACD center line crossover.

In the illustration revealed below, MACD indicator gives and generates a buy signal even though it is in bearish territory, MACD indicator then turns downwards and starts moving down again resulting into a Stock Index whipsaw. By waiting for center line crossover it is possible to avoid the fake out.

However, in this case there was a brief center line crossing: this Index whipsaw would have been difficult to trade using this MACD indicator alone, that's why it is good to combine the use of MACD indicator with another indicator. In the illustration displayed below MACD is combined with the moving average Moving Average trading indicators trading analysis.

MACD Whipsaw - Buy Signal in Bearish Territory

2. Sell Signal in Bullish Region Whipsaw

When a sell signal is derived/generated in bullish territory, it might result into a whipsaw fakeout especially if it is not followed soon by a MACD center-line crossover.

In the example revealed below, MACD indicator gives and generates a sell signal even though it is in bullish territory, MACD indicator then turns up & starts moving upward again resulting into a Index whipsaw. By waiting for center-line crossover it is possible to avoid the Indices fake out. In the example below by combining this MACD indicator with the Moving Average Cross-over Strategy you would have avoided this whipsaw.

MACD Whipsaw - Sell Signal in Bullish Territory

To avoid Index whipsaws completely when trading the markets with the MACD Indicator it is best to use the Center-line Crossover Signal as the Official Buy or Sell Signal of the MACD Indicator.

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MACD Whipsaw Fake-outs and Fake Out Signals on Bearish & Bullish Territory

Combining MACD Crossover with Center-Line Crossover to Prevent Index Whipsaws