MACD Stock Indices Whipsaws and Fake Out Signals on Bearish and Bullish Territory

Since the MACD indicator is a leading indicator which sometimes gives whipsaws, we shall look at an example of a whipsaw generated by this MACD indicator, so as to illustrate why it's always good to wait for a confirmation stock index signal.

MACD Indicator Whipsaw - Stock Indices Whipsaws

The MACD indicator gave a buy signal, when this buy signal was generated and 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 as illustrated by the moving averages which continued to move downwards.

A stock indices whipsaw signal is as a result of dramatic rise and fall in the stock index price in a short time and in such a manner that skews the data used in calculating the moving averages that draw the MACD indicator data. These types of whipsaw 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 whipsaws, 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 Crossover with Center-Line Crossover to Prevent Whipsaws

Buy signal - When there is a cross-over, followed by a steep rise in stock index price and then a center-line crossover the buy signal is confirmed.

Sell signal - When there is a cross-over, followed by a steep decline in stock index 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 stock indices whip saw especially if it is not followed soon by a MACD center line crossover.

In the example illustrated below, MACD indicator gives a buy signal even though it is in bearish territory, the MACD indicator then turns downwards and starts moving down again resulting into a stock indices whipsaw. By waiting for center line crossover it is possible to avoid the whipsaw.

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 indicator. In the example illustrated below MACD is combined with the moving average indicators analysis.

MACD Stock Indices 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 stock indices whip saw especially if it is not followed soon by a MACD center-line crossover.

In the example illustrated below, the MACD indicator gives a sell signal even though it is in bullish territory, the MACD indicator then turns up and starts moving upwards again resulting into a whipsaw. By waiting for center-line crossover it is possible to avoid the whipsaw. In the example illustrated below by combining this MACD indicator with the Moving Average Cross-over Stock Strategy you would have avoided this whipsaw.

MACD Stock Indices Whipsaw - Sell Signal in Bullish Territory

To avoid stock indices whipsaws 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 the MACD Indicator.