MACD Forex Whipsaws & Fake Out Signals on Bearish & Bullish Territory
Since MACD indicator is a leading indicator which sometimes gives whipsaw fakeouts, we shall look at an example of a fake out generated by this MACD, so as to illustrate why it's always good to wait for a confirmation signal.
MACD Indicator Whipsaw - Forex Whipsaws
The MACD indicator gave a buy 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 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 into an upswing session and then a downswing session. To minimize the risk of trading fake outs, it's 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 signal - When there is a crossover, followed by a steep rise in price & then a center-line crossover the buy signal is confirmed.
Sell signal - When there is a crossover, followed by a steep decline in price and then a center-line crossover the sell signal is confirmed.
1. Buy 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 center line crossover.
In the example below, MACD indicator gives a buy signal even though it is in bearish territory, the MACD indicator then turns downwards & starts moving down again resulting into 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 is 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 Signal in Bullish Territory Whipsaw
When a sell 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 signal even though it is in bullish territory, MACD indicator then turns up & starts moving upwards again resulting into 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 Center-line Crossover Signal as the Official Buy or Sell Signal of MACD Indicator.
