How to Play A Whipsaw Market (Like This One) And Avoid Getting Crushed

When I was working on Wall Street in 1983, I had two partners who did the trading while I did the analysis. They entered a futures trading contest. Using the Hurst cycle signals I had taught them they turned a $10,000 futures account into $990,000 in a month. They were on fire, and on the way to winning the contest. But then it happened.

They got sell signals one day and reversed their position with the goal of again compounding a massive futures profit into an even bigger fortune. The very next day, the sell signals reversed and went back to the buy side.

It was a quintessential whipsaw.

My buddies had a bit of a bearish bias and didn’t believe that signal, so they hunkered down and held their short position.

One week later their account was at zero. They got the margin call that wiped them out.

I learned an important lesson from that. I’m not smarter than the trading signals. They’re not always right, but they’re right more often than not. So… let’s let probability work in our favor.

In crazy markets like the ones we’ve seen over the past few weeks…don’t second guess signals. Don’t freeze in the headlights like a panicked deer.

Instead, here’s what to do.

I Just Got “Whipsawed” Myself – Here’s How I Stayed Afloat

I have been beta testing a technical stock trading service for the past 6 months. I publish it daily in the Wall Street Examiner Pro Trader Market Updates (more info here).

There are times when my system generates just a few or no picks each day, and other times when it gives us 6 or 7. It generates a lot of picks particularly at major turning points in the market. The charts simply generate more opportunities at those points due to the principle of synchronicity. That means that, in other words, almost everything turns at the same time.

On the morning of January 24, there were 18 longs and 9 shorts on my list. But by the morning of January 31, there had been a complete and radical reversal, with just 5 longs and 20 shorts on the list.

You will recall what came next. The market plunged. At the close on Friday, February 8 there were zero longs and 14 shorts on the list. The S&P 5oo had lost 8.8% over that 2 week period. Because we were short our list had a nice gain, crushing the S&P  (click here to get the details).

However, things degraded rapidly after that. The market made a massive reversal. The changes were coming too fast for a swing trading system geared for a holding period of several weeks. As the rally progressed, we started to see multiple buy and then sell signals over just a few days.

I call such rapid reversals “whipsaws.” That’s what traders would call it back in the day. I haven’t heard it used much these days, but I know the feeling. It’s kind of like getting rear ended in an auto accident and you get whiplashed. It hurts!

So over the past couple of weeks, my trading list got whipsawed a couple of times. Buy signals failed immediately. Dealers were running stops. Several promising trades got picked off with small losses because my stops were too tight. My trades sheet hit the fan in the second half of February, turning what started out as a stellar month into a rough slog in the second half.

But we didn’t lose our cool. Instead, we followed some hard-bought wisdom…

Instead of Panicking, “React And Reverse”

As the old traders I hung around with in the customers’ gallery back at the Philly office of Walston and Co. in the late 1960s would say. “Bulls make money. Bears make money. And pigs get slaughtered.”

It took me a long time to learn that lesson. That lesson is, don’t be stubborn because you believe that the market MUST do something. The mathematically based signals of a good trading system will keep you on the right side of the market more often than not. Sometimes there will be losses. That’s no reason to disbelieve the system. Doing that will get you hurt. Trust the system even when it’s sputtering. Over time, probability will give you consistent, compoundable returns.

Whipsaw signals happen. They are a regular feature of markets. The important thing is how you manage them. I’ve been observing markets for over 50 years. One thing I have learned is that it’s a really bad idea to disbelieve the signals of a proven trading system.

Better to react and reverse! In fact, if we don’t want those gains to turn to losses, we MUST react and reverse, and continue to do so until the market starts trending again. If instead, we decide to ignore a signal because we think that we’re smarter than the market and that the signal is wrong, it can be the death of our trading account.

Sometimes markets move in nice smooth trends. Technical chart traders love that. Trend followers make lots of money. It’s easy. The bull market of 2009-2017 was like that much of the time. Trend following permabulls made lots of money.

But there are other times when the market gets locked into a trading range and the market chops and churns. I call these periods “meat grinder” markets. Day traders, trading 10 minute bar charts, can make a lot of hay in markets like that. The same principles of cycles, support and resistance work, but they work on a much shorter term basis than in trending markets. In meat grinder markets, swing traders get turned into hamburger.

When things go against our expectations it’s critical not to panic and freeze. We must continue to react to chart signals, and to keep stops near the appropriate support and resistance levels. Traders know that drawdowns happen. Eventually the market will return to a cyclical rhythm that we can take advantage of. But we can do so only if we continue to take positions as they are signaled, look for low risk entries with good reward potential, and be willing to accept that there will be periods when the chart signals fail. It’s just a cost of doing business.


Lee Adler

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