MACD Indices Whipsaws & Fake Out Signals on Bearish and Bullish Territory

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

MACD Indicator Trading Whipsaw - Indices Trade Whipsaws

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

A indices 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 draw the MACD indicator data. These types of fake out moves are generally brought about because of some news announcement which can produce market noise.

Traders should have the ability to gauge a whipsaw and withstand the whipsaw; a whipsaw might result in to an upswing session and then a downswing session. To minimize the risk of whipsaws, it's good to wait for confirmation of trading signals by waiting for the MACD to cross above or below the zero centerline mark.

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

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

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

1. Buy Trading Signal in Bearish Territory Whipsaw

When a buy trade signal is derived & generated in a bearish territory, it might result into a trading whip saw especially if it is not followed soon after by a MACD center-line crossover.

In the exemplification explained & shown below, MACD indicator gives a buy trade signal even though it's in bearish territory, the MACD indicator then turns downwards & starts moving down again resulting into a indices whipsaw. By waiting for center line cross over it is possible to avoid the whipsaw.

However, in this case there was a brief center-line crossing: this fake out would have been hard to trade using this MACD indicator alone, that is why it is good to combine the use of MACD indicator with another trading indicator. In the illustration explained and shown below MACD is combined with the moving average indicators trading analysis.

MACD Indices Whipsaw - Buy Trading Signal in Bearish Territory

2. Sell Trade Signal in Bullish Territory Whipsaw

When a sell signal is derived and generated in a bullish territory, it might result into a trading whip saw especially if it is not followed soon by a MACD centerline crossover.

In the exemplification explained & shown below, MACD indicator gives a sell signal even though it's in bullish territory, MACD indicator then turns up & starts moving upwards again resulting into a whipsaw fakeout. By waiting for center-line crossover it is possible to avoid the indices whipsaw. In the illustration explained and shown below by combining this MACD indicator with the MA Moving Average Cross-over Strategy you would have avoided this whipsaw.

MACD Indices Whipsaw - Sell Signal in Bullish Territory

To avoid whipsaw fakeouts completely when trading the market with this MACD Indicator it is best to use the Center Line Cross over Signal as the Official Buy or Sell Signal of the MACD.

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MACD Indices Whipsaws & Fake Out Signals on Bearish and Bullish Territory

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