Avoiding Whipsaws When Trading Commodities

How to Avoid Being Whipsawed
by Erich Senft, CTA

The word "Whipsaw" is something that puts fear into the hearts of futures traders everywhere...and especially those traders who have smaller trading accounts.  The smaller the account, the more likely you are to have experienced the dreaded whipsaw.

What is a Whipsaw?

A Whipsaw happens when both your entry order and your stop loss exit order are filled in the same session, effectively stopping you out for a loss. First the market goes one way then rapidly changes direction and stops you out.

Low volume or liquidity is another reason that whipsaw trades are more likely to occur during the summer, especially late August, because a lot of futures traders are away on their summer vacation. Their absence means less liquidity which can result in larger trading ranges and an increase in whipsaw trades.

The markets are particularly susceptible to whipsaw trades during the summer when many of the commodity markets being crop markets are extremely sensitive to any changes in weather or crop conditions, and will react extremely fast to changes. These rapid reversals have the potential to whipsaw you out of what otherwise seems to be a good trade.

How Do You Avoid Whipsaw Trades?

How can the average small commodity trader avoid getting whipsawed out of a trade? Unfortunately  the foolproof way to avoid whipsaws does not exist, however there are some preventive measures you can take to make it less of a likelihood.

1. Stay with the trend
   During the summer particularly it is very important that you trade with the trend as much as possible. Try to avoid countertrend trades unless you have an excellent reason for taking one. Be sure to keep your exit stop close and use a profit taking target to maximize your potential profit if you do end up taking a countertrend trade.
2. Use only the strongest support and resistance levels
   As a small trader this is one of the most important things you can do to avoid being whipsawed. Make the market come to you before getting into your trade. Using stronger resistance will normally keep you on the right side of the market.  Look for the market to break a secondary support or resistance level before entering the trade. Sometimes this may mean you have to givie up some of the potential profit in the trade, but the upside is you will usually get into a trending market instead of a choppy one. Waiting for the market to breach the secondary resistance level also means a stronger support or resistance area which should enable you to keep your risk/reward ratio more favorable.
3. Don't ignore the big picture
   Remember that the markets can be choppier in late summer so you shouldnt place too much emphasis on any single daily range – unless of course the range is particularly large . Under these conditions it is more important than ever to be patient with the markets... they can look bearish one day and bullish the next day. Don't get too focused on trading the daily changes however, try looking at a weekly chart  to get an overall view of the charts if you find yourself concentrating too much on the last few bars of the chart. To keep your perspective consult a weekly chart which will will allow you to see the predominant market trend more clearly than the daily chart will.
4. Whipsaws are a part of trading!
   Regardless of how careful you are and how well you research your support and resistance lines and monitor your opening ranges, whipsaws can still occur. Learn to manage your losses, minimizing them so you don't blow through your account.

Those of us who are support and resistance technicians are fortunate in that we can usually keep our losses small enough that they do not wipe out our accounts. Even so, it is hard not to let losses hurt our hearts. Regardless of how unpleasant whipsaw trades can be, try not to let them affect you too much emotionally. Emotional traders are losing traders.

Trying to "get even" with the market. is an exercise in futility and will usually only exacerbate the situation which might get you caught in even more whipsaw trades. Nobody can accurately predict what the markets will do...sometimes they behave as expected, and sometimes they do not. It is important that when the market is not doing what you expected that you exit the trade with as little damage to your account as possible.

Take pride and solace in managing your account really well regardless of the trade outcome. This is what differentiates professional traders from dabblers. When thae markets enter a really choppy phase, rather than continue to trade it is sometimes prudent to go flat and remain so  until things begin to look a little more settled.

Remember, no one says you have to trade at this time of the year.

-Erich Senft, CTA
www.supportandresistance.com

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