MACD Indices Whipsaws and Fake Out Signals on Bearish & 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 & 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 shown/illustrated by the MAs 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 whipsaw market signal moves are in general brought about by some economic news announcement which can produce market noise in the short term market movement of the price.

Traders should train on how to develop the ability to gauge a market whipsaw and withstand the whipsaw; a whipsaw fake-out might result into an upswing session and then quickly followed by a downswing session. To minimize the risk of these whipsaws, it's good for you as a trader to wait for confirmation of tour trading signals by waiting out for the MACD indicator to cross above or cross below the zero center-line mark.

Combining MACD Crossover with Centerline Crossover to Prevent Stock Index Trade Whipsaws

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

Sell signal - When there is a cross-over, followed by a steep decline in price and then a centerline cross over the sell 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 whip saw especially if it's not followed soon after by a MACD center-line cross-over.

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's good to combine the use of MACD indicator with another 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 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 cross-over it's 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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Trade Stock Indices

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

Combining MACD Crossover with Centerline Crossover to Prevent Stock Index Trade Whipsaws