MACD Indices Whipsaws & Fake Out Signals on Bearish & 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 signal.

MACD Indicator Whipsaw - Indices Whipsaws

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

A Indices whipsaw signal is as a result of dramatic rise & fall in the price in a short time & in such a manner that skews the data used in calculating the moving averages that plot 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 trading whipsaw might result into an upswing session & then a downswing session. To minimize the risk of trading Stock Indices 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 crossover, followed by a steep rise in price & then a center-line crossover the buy Indices signal is confirmed.

Sell signal - When there is a crossover, followed by a steep decline in price & then a center-line crossover the sell signal is confirmed.

• 1. Buy Signal in Bearish Territory Whipsaw

When a buy Indices signal is generated in a bearish territory, it might result into a whipsaw especially if it is not followed soon by a MACD center line crossover.

In the example below, MACD indicator gives a buy Indices signal even though it is in bearish territory, the MACD indicator then turns downward & starts moving down again resulting into a 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'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 technical analysis.

MACD 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 whipsaw 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, the MACD indicator then turns up & starts moving upward again resulting into a whipsaw. By waiting for center-line crossover it is possible to avoid the Stock Indices whipsaw. In the example below by combining this MACD indicator with the MA Crossover Strategy you would have avoided this whipsaw.

MACD Indices Whipsaw - Sell Signal in Bullish Territory

To avoid 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.