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

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

MACD Indicator Whipsaw - Forex Whipsaws

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

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 indicator data. These types of whipsaw fakeout moves are usually brought about because of some news event that 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 trading fake outs, it is good to wait for confirmation of signals by waiting for MACD to cross above or below the zero center line mark.

Combining MACD Cross over with Center-Line Crossover to Prevent Whipsaws

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

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

1. Buy Trade Signal in Bearish Territory Whipsaw

When a buy signal is generated 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 example below, MACD indicator gives a buy trade signal even though it's in bearish territory, the MACD indicator then turns downwards & starts heading down again resulting in to a forex whipsaw. By waiting for center line crossover it is 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 this MACD indicator alone, that is why it's good to combine the use of MACD indicator with another technical indicator. In the example 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 Whipsaw

When a sell trade signal is 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 example below, the MACD indicator gives a sell trading signal even though it is in bullish territory, MACD indicator then turns up & starts moving upwards again resulting in to a fake out. By waiting for center-line crossover it is possible to avoid the whipsaw fakeout. In the example below by combining this MACD indicator 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 this MACD Indicator it is best to use the Centerline Crossover Signal as the Official Buy or Sell Signal of MACD Indicator.

More Topics and Lessons:

Trade Forex Trading

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

Combining MACD Cross over with Center-Line Crossover to Prevent Whipsaws