The Whipsaw strategy for the Forex market can bring good profit if there is a strong price movement. If a flat begins on the chart, it is better to use a different trading algorithm. Whipsaw will be a good option for those who are used to trading for a trend.
Forex trends are not straight up or down lines. They develop in waves: an impulse and a correction, then a new impulse and a new correction. Such movement resembles the trajectory of a whipsaw — forward and backward (or vice versa).
The Whipsaw strategy is based on this regularity. This trading algorithm often uses the conventional MT4 Gann indicator.
Some critics point out that this strategy is outdated. But practice shows the opposite: Whipsaw can bring a significant profit. And it is applicable not only in trading with currency pairs, but also in trading with CFD contracts.
The MT4 Gann algorithm, on which the strategy is based, looks like a broken line. This indicator was developed before the financial crisis and was called Gann HiLo. On the screenshot below, you can see its original shape.
The first version of the strategy simultaneously used two Gann HiLo indicators on one hourly chart. For calculation of yellow, an interval of 5 candlesticks was used, for green — 20.
The layout formed for Н4 allowed to determine the direction of the trend. The H1 timeframe was used for finding entry points.
Later, traders found inconsistencies in some data at different time intervals, and the developers improved the indicator. The updated version got the MT4 prefix. As a result, the algorithm became known as MT4 Gann.
After these changes, the indicator started showing bullish and bearish trends in different colors and layout in steps. In this case, indicators from H4 are imported to the H1 chart.
This format of the Whipsaw strategy is used by traders even today.
A more advanced variant involves installing two MT4 Gann indicators simultaneously:
- Set to work wih the H4 chart. It should indicate the value after closing the next 4-hour candlestick.
- Set to work wih the H1 chart. Hourly candlesticks are taken into account here.
If you need, you can adjust the indicator at your discretion. But this is not necessary, and you can use ready-made templates. In these templates, lines are already properly colored.
The following option is considered the standard:
For Gann H4:
- line turns blue if the 4-hour candlestick indicates a rise in price;
- line turns red if the 4-hour candlestick indicates a downward movement.
The hour line also has 2 colors:
- yellow or orange indicating a decline in price;
- green confirms the growth of the asset value.
To get a stable profit using Whipsaw, it is important to take into account the general market situation. The strategy itself is needed to understand the current state of the trend, as well as to identify correction points. The market should be entered on pullbacks. But if fundamental factors confirm the high probability of a trend change at that time, then it is better not to open a trade.
Position opening conditions
In the Whipsaw strategy, a sell trade is opened upon the following signals:
- When the Gann H4 indicator becomes red (bearish) after closing of the 4-hour candlestick and is above the hour line (Gann H1). Red color is required, as it confirms the downtrend.
- The Gann H1 indicator turns green and is located below the Gann H4. This change indicates the beginning of a correction. In this case, it is the time to open a trade at a profitable price.
After the next candlestick closes below the Gann H1 line, the indicator color changes from green to golden. In such a situation, a Sell order should be opened if the hourly candlestick closes in the direction of the bears.
The trade should be closed when the color of the Gann H1 changes from golded to green.
Stop loss is placed at the last high: 55 points from the opening price of the trade (or at least 30). Take profit is set at 150 points. When the trade goes into plus 50 points, it is necessary to set it in the black. If the distance between the Gann H1 line and the entry point is greater than 55 points, a position should not be opened.
Entering the market with a buy transaction is carried out under the following conditions:
- The Gann H4 indicator turns blue after the close of the 4-hour candlestick. It should be below the Gann H1 line itself. This change indicates the tendency of the currency pair to grow in the medium term.
- The Gann H1 changes from green to gold. The market can be entered during the correction when the hour line is above the 4-hour line.
- Several candlesticks above Gann H1 close and the hour indicator turns green. If the next candlestick develops in a bullish direction, you can open a buy trade.
It is necessary to exit the trade when the color of Gann H1 becomes golden.
Stop size is 30 to 55 points. It shall be set at the last low. Take profit is 150 points. A position should be set in the black when the profit reaches 50 points. For any type of order, the trade must be closed manually if a price reversal is formed on the hour line, even if the take value has not yet been reached.
When using the Whipsaw strategy, it is important to pay attention to the intersection of the lines of the Gann H1 and Gann H4 indicators. This price behavior indicates a transition to a flat movement. In this situation, trades should not be opened. In a sideways market, the number of signals will be minimal and you will not be able to make a tangible profit. But the risks of losses will increase markedly.
Advantages and disadvantages of the Whipsaw strategy
This trading algorithm can be classified as primitive, since it generates only simple signals.
The advantages of such work with the market are as follows:
- Frequent signals. You can identify the strongest ones by analyzing history.
- Even an inexperienced player can easily master the trading rules.
- The time for trading can be reduced by notifications and the H1 timeframe: one candlestick is formed per hour.
- Whipsaw can be highly profitable on trending charts.
The disadvantages include the following:
- Whipsaw is not suitable for trading in sideways price movements.
- On some currency pairs, price level breakouts does not allow opening a trade on time.
- Sometimes it is necessary to set too large stop loss.
How to simplify trading with the Whipsaw strategy
The Xaser_FV indicator can be used for timely identification of flat in the Whipsaw strategy. It allows you to measure market volatility. A position should not be opened if the value of this indicator is zero.
Another way to neutralize the problem of late entries is to use the Gann H4 indicator with the addition of some kind of oscillator. It can be RSI, stochastic or cash flow index. Price Action patterns can be used instead of oscillators. They allow to determine the position opening points more accurately.
With this approach to the implementation of the Whipsaw strategy, trend trades should be opened from overbought or oversold areas.
The work by this strategy can be simplified and made more accurate with the help of advisors. For example, our VR Black Box robot shows quite good results when trading by the Whipsaw strategy. We have developed it back in 2009 and have been constantly improving it for 12 years now.
Following the principles of the strategy, the advisor can perform the following actions:
- when the price rises, buy an asset in the same volumes, with the installation of Stop Loss and Take Profit;
- when the rate falls, open a sell trade with the same volumes, also with Stop Loss and Take Profit;
- fix the position when the take profit is reached, then open a new order if there are appropriate signals;
- in case of a failed trade, increase the size of the next position to compensate for the loss.
The program has two modes of operation: manual and automatic. Additionally, it implements a number of algorithms to optimize trading:
- lot calculation method selection;
- maximum lot size limit;
- hiding virtual Stop Loss and Take Profit using real levels;
- taking into account the widening of the spread;
- trading based on periods;
- working by signals;
- alerts on transactions;
- working with any assets.
You can find more detailed information about this advisor, as well as test and order it for personal use at the following address: VR Black Box