MACD Whipsaw Analysis: Spotting Fake-Outs in Bearish and Bullish Markets

Since MACD is a leading indicator prone to occasional false signals, it's advisable to wait for confirmation before acting. As an example, whipsaw fakeouts caused by MACD demonstrate the importance of patience in trading decisions.

MACD Whipsaw - Stock Index Fake-outs

The MACD showed a buy signal. This signal came when the MACD line sat below the zero centerline. The signal lacked confirmation at that time. It caused a whipsaw. The moving averages kept dropping to show this.

An index whipsaw signal shows up when prices swing wildly in a short time, throwing off the moving averages that feed into the MACD. Big, sudden moves like this usually happen after a news announcement shakes up the market, creating a lot of noise.

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 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.

Mitigation of Index Fluctuations by Merging MACD Crossover with Center-Line Crossover

A buy signal gets confirmed when a crossover happens, followed by a sharp price rise and then another center-line crossover.

Sell signal - A sell signal is confirmed when there's a crossover, then a big drop in price, and then another crossover at the center line.

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 produces and generates a buy signal even though it remains in negative territory, MACD then pivots downward and begins moving down again resulting in a Stock Index whipsaw. By expecting centerline crossover it is feasible to evade the false-out.

But, there was a quick crossing of the center line: this whipsaw would have been hard to trade using just MACD, so it helps to use MACD with another indicator. In the picture below, MACD is used with the moving average Moving Average trading indicators trading analysis.

MACD Whipsaw - Buy Signal in Bearish Territory

2. Sell Signal in Bullish Region Whipsaw

A sell signal in uptrending area can lead to a false move. This happens without a quick MACD line cross in the middle.

In the example shown below, MACD gives a signal to sell even when it seems like a good time to buy: then MACD goes up again, causing the Index to change directions quickly. By waiting for the line to cross the middle, you might not get tricked by the Indices. In the example below, using MACD with the Moving Average Cross-over Method would have helped you avoid this quick change.

MACD Whipsaw - Sell Signal in Bullish Territory

To entirely avoid index whipsaws while trading the markets using the MACD, it is advisable to utilize the Center-line Crossover Signal as the definitive buy or sell signal from the MACD indicator.

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MACD Whipsaw Analysis: Spotting Fake-Outs in Bearish and Bullish Markets

Mitigation of Index Fluctuations by Merging MACD Crossover with Center-Line Crossover