In stock price, a whipsaw is a sudden and quick movement of a security at a particular time to the opposite direction. There are two kinds of patterns following the movement of the whipsaw. The first pattern is an upward movement in a share price. In the first pattern, drastic downward happens causing the share price to plummet to its original position. The second pattern happens when a share price plunges in value in a short time. Then, all of sudden it increases upward to a positive gain to the stock’s original position. In a nutshell, whipsaw is about a stock price movement that suddenly changes direction.
Originally, whipsaw was coined from the push and pull action of lumberjacks when cutting wood. Whipsawed trader means, the person encountered the price of an invested security that switches in the unexpected direction. In most cases whipsaw commonly happens during volatility where price fluctuations are unpredictable. Those who experience whipsaw the most are short-term investors and day traders. This is because long-term investors use a boy and hold approach allowing them to get positive gains even during volatility.
Investors choose to go long on a stock because the value will increase over time. On the other hand, there are many occasions where an investor purchases shares during a market rally. Because buying stock at its peak might get significant gains. Then, all of sudden after purchasing the stock, the company posts a quarterly report. The report might shock the investor confidence impacting the stock value decline by more than 10%. In this case, the investor faces loss while holding the stock with no option of selling it. This is the epitome of whipsaw.
