One thing you should be aware of during volatility is whipsaw. Whipsaw is when the security price moves in one direction, but all of sudden it pivots to the opposite direction. The first type of whipsaw is when the share price moves upward. It causes drastic downward leading to the fall of share prices to its original position. The second pattern of whipsaw is when a share price falls in value for a short time, then all of sudden it surges upward.
It is a whipsawed traders when they encounter the invested security abruptly moves in the opposite direction unexpectedly. This is the reason why whipsaw occurs during volatile markets when the fall and rise are highly unpredictable. Therefore, short-term investors and day traders are very common to whipsaw. In other words, those who own a long-term or buy and hold approach can often ride out the volatility.
The epitome is when an investor takes a long on a stock, the value expectation would increase over time.
Meanwhile, there are also occasions where investors purchase shares at the top of a market rally. In this case, the investor buys a stock at its peak for it would have continued the significant gains. The company releases a quarterly report after stock purchasing that surprises investor confidence. It could cause a decline in value of the stock as much as 10%. It is then never able to recover.
On the other hand, investors who short-sell are prone to whipsaw at the bottom of a market. For example, if an investor anticipates the downturn by purchasing options at S&P 500, the profit would continue to decline. But, after purchasing the put options, all of sudden the market rallies and they could become out of money. In the recovery phase, whipsaw could inflict loss of investment.
