Whipsaws and Forex Trading System Platforms

New Forex investors should be wary of whipsaws that develop on Forex trading system platforms. Whipsaws represent market volatility, with no real lasting trends. David Feder 1/15/2009

Beware of the Whipsaw! One of the trickiest aspects of trading in any investment market is to know when to make that trade. The Forex market is no different, as currency rates can fluctuate widely, even within the span of 15 minutes or so. An inexperienced trader might place that buy or sell trade when the market suddenly plunges or rises, not wanting to miss a good deal. However, trading on a Forex trading system when there is great volatility might be a recipe for disaster if an investor doesn’t know when to ignore the erratic behavior of the market. Is there a name for this erratic behavior? Besides just saying that the market is temperamental, the official term for this type of behavior is “whipsaw.” Like a roller coaster, the whipsaw takes the investor for a wild ride, with lots of ups and downs in the market, within a short period of time. It can give an investor a lot of false readings for market movement, even within 15 minutes of trading time. Just when an investor plans to place a trade on a Forex trading system because he thinks that the market is trending upward, it begins to lose power and quickly retreats. What causes whipsaws? Whipsaws occur when market momentum can’t be maintained. In other words, no real trend exists on a Forex trading system. This market insecurity can occur for a number of reasons such as upcoming financial news or uncertain political times. For example, if the Federal Reserve Bank chairman is about to make a decision on interest rate increases, and the market truly does not have a clue if rates will go up or down, it can create great uncertainty in the market. If the unemployment figures are due to come out shortly, and it’s uncertain whether or the not the numbers will be positive, then that can also create market uncertainty. Once the news does come out, however, trends (true break-outs) can develop, and market momentum can usually last longer. What to do when whipsaws occur? Investors should develop a good dose of patience when trading on one of the Forex trading system platforms. If clear trends don’t develop over a significant amount of time (unless the trader exclusively uses a scalping strategy), then it’s best that the trader sits it out and waits for actual, longer-term trends to develop.