During your trading, have you ever encountered a moment when a security’s movement drastically change? If so, then you have experienced whipsaw or a head-fake trading.
To be specific, the term refers to the security’s sudden, unexpected movement to a contrasting direction from where it actually heads before. For instance, imagine that you look at a series of skyscrapers that lines up like staircase but suddenly there is a small house next to it.
While the illustration above perhaps infuriates you mildly due to the sudden, nonlinear consistency, it generates a more painful impact in trading. Whether it is Forex or stock you name it, the impact is highly possible to cost you unnecessary losses.
Being an unpredictable situation, the damage can actually be overseen to some extent. The following passages will disclose what the situation is and how it mostly happens.
Also Read: Applying Momentum Indicators in Your Trading Strategy
A Brief Explanation of Whipsaw and Head Fake in Trading
Both whipsaw and head fake actually mean the same thing. They describe the drastic movement of a particular security’s direction to the opposite way.
So, how are they different from each other? To be fair, experts mostly use the term interchangeably as the meaning has almost no difference. Some people name it a whipsaw, the others say a head-fake trade, while some also call it as a fake-out.
There is, however, a slight dissimilarity of tone between the terms. Head-fake, borrowed from Baseball, connotes a betrayal as the direction changes not long after you invest in it. The same goes for fake-out.
At What Time and Market They Usually Occur
Traders mostly encounter the phenomenon in a highly volatile market, such as during the rising tension of US-China trade war. With the confusing, unpredictable movement of the markets, it is no surprise that many traders get ‘whipsawed.’
Several experts also identify that whipsaw or head-fake will most likely happen if the prices keep on moving at the same direction, but the momentum and the volume do not go along with the escalation.
Moreover, short-term trading strategies are more vulnerable to the phenomenon rather than the long-term ones.
Also Read: Calculate Momentum Indicator for Trading Strategy
