WHIPSAW: A change of trading signals within a relatively short period of time.
Trading aims to reduce risk and to compound gains. The better trading systems reduce the number of whipsaws, but they all have them.
Two types of whipsaws
BUY signal SOON after a SELL signal. In this type of whipsaw, traders usually BUY BACK AT HIGHER PRICES.
SELL signal SOON after a BUY signal: In this type of whipsaw, traders often LOSE MONEY.
Worst case scenario: Even in the best of trading systems, you can have type 1 whipsaw followed by type 2.
Problem #1: No-one can be emotionally prepared for whipsaws.
Problem #2: Whipsaws can come in consecutive trades.
Problem #3: After being whipsawed a few times, there's a tendency to ignore signals -- which can be VERY costly.
Are they worth it?
WHIPSAW frustrations are the PRICE traders pay for:
Lowering risks (by being out of the market part of the time) and,
Significantly increasing profit potential (by finding the "better mousetrap").
Protections
Use more than one trading system.
Select a time frame (short, intermediate, long) which suits your personality.
Prefer trading systems back tested for long periods of time.
Corollaries: The shorter the time frame of a trading system -- the more whipsaws it is likely to have. With a longer time frame, you have fewer profits over a ten year period -- and fewer whipsaws -- everything else being equal.
Systems which attempt to eliminate ALL whipsaws miss many good profit opportunities.
Traders have no alternative except to learn to live with whipsaws. It's part of the discipline. Those who don't have the courage and patience to endure trading losses are very likely to pay a much larger price for holding on to bad trades.
