MACD Whipsaws and Fake Out Signals on Bearish & Bullish Territory
Since the MACD indicator is a leading indicator which sometimes gives fake outs, we shall look at an example of a whipsaw fakeout generated by this MACD, so that to illustrate why it's always good to wait for a confirmation signal.
MACD Indicator Whipsaw - Stock Indices Whipsaws
The MACD indicator gave a buy signal, when this buy signal was generated and the MACD indicator line was still below the 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 Stock 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 because of some news event that can produce market noise.
Stock Index traders should have the ability to gauge a Stock Indices whipsaw & withstand the whipsaw; a Stock Indices whipsaw might result into an upswing session and then a downswing session. To minimize the risk of trading Stock Index whipsaws, it's good to wait for confirmation of signals by waiting for MACD to cross above or below the zero center-line mark.
Combining MACD Crossover with Center-Line Crossover to Prevent Stock 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 is confirmed.
Sell signal - When there is a crossover, followed by a steep decline in price and then a center-line crossover the sell signal is confirmed.
1. Buy Signal in Bearish Territory Whipsaw
When a buy signal is generated in a bearish territory, it may result into a fake out especially if it isn't followed soon by a MACD center line crossover.
In the example below, MACD indicator gives 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 Stock Indices whipsaw would have been hard 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 example below MACD is combined with the moving average indicators technical analysis.
MACD Whipsaw - Buy Signal in Bearish Territory
2. Sell Signal in Bullish Territory Whipsaw
When a sell signal is generated in a 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 below, MACD indicator gives a sell signal even though it is in bullish territory, MACD indicator then turns up & starts moving upward again resulting into a Stock Indices 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 Crossover Strategy you would have avoided this whipsaw.
MACD Whipsaw - Sell Signal in Bullish Territory
To avoid Stock Indices whipsaws completely when trading the market with this MACD Indicator it is best to use the Center-line Crossover Signal as the Official Buy or Sell Signal of the MACD Indicator.
