What is Whipsaw in Investing?

Whipsaw in investing is when a stock, market, or trading indicator shows one thing and then quickly moves in the opposite direction. Whipsawing markets or securities can lead to trading losses if traders enter or exit their positions at the wrong time.

Whipsaw in investing, generally, means when a stock, market, or trading indicator shows one thing and then quickly moves in the opposite direction. Whipsawing markets or securities can lead to trading losses if traders enter or exit their positions at the wrong time.

A whipsaw in investing occurs when any asset price or indicator quickly moves in the opposite direction that it had been going.1 Whipsaws can occur in both rising as well as falling markets.

Upmarket whipsaws occur when a market or security, generally witnessing an upward movement in prices, experiences a sudden downtrend before resuming its upward trajectory.

When an indicator or security is declining, but suddenly reverses course to rise for a short while before continuing on its downward path, it’s called a downmarket whipsaw.2

When a stock moves sharply in one direction, and then sharply in another it is whipsawing. Though a whipsaw generally means the asset moves against the prevailing trend (so it increases during a downtrend or decreases during an uptrend), it is also used for assets that don’t have an established trend.

Coinbase (COIN) is a good example of a stock that saw whipsaw trading even though there was no established trend. On its first day of trading, April 14, 2021, it debuted at $381, shot up past $429.54, and then sharply decreased, ending the day at $328.28.3 Those sharp increases and decreases were whipsaw moves.

A trader gets whipsawed if they buy a security immediately before its price drops or sell a security right before its price jumps, leading to losses.4

So in the example above, if a trader had opened a position in COIN at $400, saw profits for a little while, and then had been stopped out by the drop to $328, the trader was whipsawed out of their position. Whipsaw losses are a common part of trading.

Whipsaw often happens when a stock is either overbought or oversold. Trend traders buy stocks that have been going up and short stocks that have been going down. At times, too many traders pile into these stocks and they get “overheated”. Overbought stocks are ones that have too much buying demand and have traded above their fair value. Oversold is the opposite.

Stocks that are overheated are at the risk of a whipsaw because the further away they move from fair value, the fewer traders there will be to keep up the buying or selling demand on shares. When there aren’t enough and traders start taking profits en masse, a whipsaw can happen.

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