An occurrence when a technical signal or price action itself suggests a reversal or a breakout, but the market does not follow through; a fake-out
Whipsaw describes a market situation when price action abruptly reverses its trend, only to resume the trend a shortly after. The move against the prevailing trend can cause false trading signals on technical indicators such as moving averages.
When a trader gets “whipsawed” he initiated a trade, betting that the prevailing trend was ending, only to have it resume soon after. Clear-out price action can also whipsaw a trader when he or she believes the market is moving out of a range in a trend, only to see it return to the range.
The trader is whipsawed if he or she initiated a short position in a false break out of a pattern. In the middle example, the market did follow the bearish break with a decline. This suggests that it is also up to the trader whehther he or she is whipsawed. A short position could still be “whipsawed” if the trader fails to exit due to an expectataion of a stronger downtrend, but is instead faced with a quick reversal back for a bullish attempt.
