What Is Whipsaw?
Whipsaw describes the movement of a security when, at a particular time, the security’s price is moving in one direction but then quickly pivots to move in the opposite direction. There are two types of whipsaw patterns. The first involves an upward movement in a share price, which is then followed by a drastic downward move causing the share’s price to fall relative to its original position. The second type occurs when a share price drops in value for a short time and then suddenly surges upward to a positive gain relative to the stock’s original position.
Understanding Whipsaw
The origin of the term whipsaw is derived from the push and pull action of lumberjacks when cutting wood with a saw of the same name. A trader is considered to be “whipsawed” when the price of a security they have just invested in abruptly moves in the opposite and unexpected direction.
Whipsaw patterns most notably occur in a volatile market in which price fluctuations are unpredictable. Day traders or other short-term investors are accustomed to being whipsawed. Those who have a long-term, buy and hold approach to investing can often ride out the volatility of the market and emerge with positive gains.
Making Sense of the Confusion
What is actually happening on these key levels are the clashes between the traders with the motivation to continue and rally, against the traders with less motivation to stick it out. These clashes are the meeting of orders injected into the market from both sides. Often in these scenarios, the orders are injected in a very experimental way.
The opposing sides of the clash will send more and more orders to gauge how the market receives them. When they see their opponent’s side win and they’re invested in the opposite, they will try to hit harder from their position and vice versa.
This causes the market to change direction after a fakeout. All these clashes between big players cause these effects that make prices go up and down. Eventually, one side will win but during the period of clashes, it’s an extremely volatile whipsaw event that small-time traders will be caught in between and potentially wiped out.
Hahaha. I’m assuming this can also be applied to crypto since that market is even more volatile than forex? 