MACD Forex Whipsaws and Fake Out Signals on Bearish and Bullish Territory

Since MACD is a leading technical indicator that sometimes gives and generates whipsaw fakeouts, we shall look at an example of a fake out generated by this MACD, so that to show why it's always good to chill and wait for a confirmation trading signal.

MACD Whipsaw - Forex Whipsaws

The MACD gave a buy trade signal, when this buy signal was generated & the MACD line was still below zero center-line mark. At this point the buy trading signal had not been confirmed & it resulted into a whipsaw fakeout such as illustrated by the moving averages MAs which continued to move downward.

A forex 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 data. These types of whipsaw fakeout moves are generally brought about because of some news event/announcement which can produce market noise.

Traders should have the ability to gauge a whipsaw and withstand the whipsaw; a whipsaw might result in to an upswing session and then a downswing session. To minimize the risk of fake outs, it's good to wait out for confirmation of trading signals by waiting for MACD to cross above/below zero center-line mark.

Combining MACD Cross over with Center-Line Crossover to Prevent Whipsaw Fake-outs

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

Sell trading signal - When there is a cross-over, followed by a steep decline in price and then a centerline crossover the sell trade signal gets confirmed.

1. Buy Trade Signal in Bearish Territory Region Whipsaw

When a buy signal is generated/derived in a bearish territory, it might result into a whip saw especially if it is not followed soon by a MACD centerline cross-over.

In the illustration below, MACD gives and generates a buy trade signal even though it's in bearish territory, the MACD then turns downwards & starts heading down again resulting in to a forex whipsaw. By waiting for centerline crossover it's possible to avoid the fake out.

However, in this case there was a brief center-line crossing: this whipsaw would have been hard to trade using MACD alone, that's why it's good to combine the use of MACD indicator with another indicator. In the illustration below MACD is combined with the moving average indicators analysis.

MACD Forex Whipsaw - Buy Signal in Bearish Territory

2. Sell Trade Signal in Bullish Territory Region Whipsaw

When a sell trade signal is derived/generated in a bullish territory, it might result into a whip saw especially if it is not followed soon by a MACD center line crossover.

In the illustration below, the MACD gives a sell signal even though it is in bullish territory, MACD then turns up & starts moving upwards again resulting in to a fake out. By waiting for centerline cross-over it's possible to avoid the whipsaw fakeout. In the example below by combining this MACD with the MA Cross-over Strategy you would have avoided this whipsaw.

MACD Forex Whipsaw - Sell Signal in Bullish Territory

To avoid fake outs completely when trading the market with the MACD it is best to use the Centerline Crossover Signal as the Official Buy or Sell Signal of MACD Indicator.

More Topics & Lessons:

Trade Forex Trading

MACD Forex Whipsaws and Fake Out Signals on Bearish and Bullish Territory

Combining MACD Cross over with Center-Line Crossover to Prevent Whipsaw Fake-outs