"Whipsaw" is a word that strikes fear into the heart of every trader. The smaller your account the more afraid of being whipsawed you are likely to be. Whipsawing is when the market fills your entry order and your stop loss exit order in the same session, effectively stopping you out for a loss. The summer months are especially bad for whipsaw trades.
Since many of the commodity markets are crop markets they are extremely sensitive to any changes in market or crop conditions, and will react quickly to a change in either. This quick "about face" has the potential to whipsaw you out of a seemingly good trade.
One other reason that whipsaw trades are more likely to occur during the summer months is that many traders are on summer vacation, this is especially true the last few weeks of August as families try to squeeze in a couple of weeks away before the children have to go back to school. The absence of some of these traders leads to a slightly thinner marketplace, which in turn can lead to larger daily ranges and the resulting whipsaw trade.
So what can be done? Is there anything the small trader can do to avoid getting whipsawed? While there is no foolproof way to avoid getting whipsawed there are a couple of things you can do to make it less likely. The most important thing you can do as a small trader is to use only the strongest support and resistance levels to base your trades on. Using the stronger resistance will normally keep you on the right side of the market and "make the market come to you" before entering the trade.
If the risk vs. reward ratio allows it, I normally like to see the market break a secondary support or resistance level before entering the trade. Sometimes this means giving up some potential profit, but in return you will usually get into a trending market instead of one that is just chopping about. The second benefit of waiting for the market to breach a secondary resistance level is that you can use the stronger support or resistance area to cover your trade, which should enable you to keep risk to a reasonably small amount.
It is also important that you continue to try and trade with the trend as much as possible, especially at this time of the year. Do your best to avoid countertrend trades unless you have a very good reason for taking one, and if you do take a countertrend trade keep your exit stop close and use a profit taking target to maximize your potential profit. Bear in mind that because the markets tend to be choppier at this time of the year, you should avoid placing too much emphasis on any single daily range - unless it is a large range of course.
Because of the added choppiness it is more important than ever to be patient with the markets. Be prepared to see the markets look bullish one day and bearish the next. Don't get caught up in trading the daily changes however, keep your eye on the bigger picture. Step back and take an overall view of your charts in order to keep your perspective if you find yourself concentrating too much on the last few bars of the chart. If necessary consult a weekly chart which will normally show the predominant market trend more clearly than the daily.
Lastly realize that whipsaws are a part of trading. Regardless of how well you search out your support and resistance lines and monitor your opening ranges, whipsaws can still occur. Fortunately for us support and resistance technicians, we can usually keep the losses small enough that they do not adversely affect our accounts; although our egos can be a different story.
As unpleasant as whipsaws are, try not to let them affect you too much emotionally. Avoid the desire of trying to "get even" with the market. This rarely works and will usually only make matters worse, likely resulting in yet more whipsaw trades. After all, we are dealing with an uncertain future. Sometimes the market will behave as it is supposed to, and other times it will not. It is important that at those times when the market is not behaving as anticipated, you exit the trade with as little damage to your account as possible.
Take solace in managing your account well, even if it is a losing trade. This is what differentiates traders from fortune tellers. Whipsaw season will pass soon; just make sure you have enough of an account left that you can still trade when it is over. Sometimes the best course of action is just to wait the market out for a few weeks until things begin to look a little more settled. Remember, no one says you "have to" trade at this time of the year.