Whipsaw is a condition where traders experience a loss when the security or the price of stock suddenly falls soon after it is bought. A person is said to be whipsawed when the price of the stock suddenly moves in the opposite direction of a trade that has just been placed. This happens when the market condition is volatile and fluctuations in price are difficult to predict.
The trader may buy a stock just before the prices are about to drop and sell it just before the price of the same stock is about to rise. Whipsaw stocks may not necessarily always fall. Let’s say the price of a stock would rise by Rs.10 per share and then fall by Rs.20 per share or it could even fall by Rs.5 per share and then rise by Rs.10 per share. Both these conditions are considered as a whipsaw.
This is a more common phenomenon among short term traders than the ones who hold long term investment. At a sudden moment, the price of the stock may start moving into the opposite direction and there is no way for the trader to turn the stock into profit, hence, he is whipsawed. This may also happen to stocks whose prices have been increasing significantly in the past few months and suddenly falls due to an unexpected change in the company (like a change of board or publication of financial reports) or volatile market condition. An investor who has put his options for a short sell may also face a loss during a whipsaw as the stock price may rally (period of sustained increase) causing his investments to be of waste.
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