Friday, 14 June 2019

Dead Cat Bounce Trading Strategy

What is A Dead Cat Bounce
 By Deya Hroob


It is a small, brief recovery in the price during a strong bearish trend. Either because of sudden news or because of profit taking.
Some traders can't distinguish it from a real reversal trend which may cause them huge losses when the price resume it's bearish way.
 Personally I call it " Fake Reversal "

  Numerous trend indicators can help any trader to spot a real reversal in trend than a fake one ( dead cat bounce) such as Moving averages, MACD and Parabolic SAR.

To summarize the strategy:
  1. Identify a pair in a bearish trend.
  2. Spot a correction in price.
  3. Wait the price to break the last low. 
  4.  Open short position.
  5. Place stop loss above the last high.

How to trade Dead Cat Bounce?

This is WTI Crude Oil daily chart. As we can see the price started to went up after a bearish movement. However, neither the moving averages nor the Parabolic SAR did signal a reversal. Now, we need a confirmation of a Dead Cat Bounce, which happened when the price plummeted below the last low at $ 58.13 so that we could open a short position at this level.


Let's take another example. This is USD/JPY daily chart. After a hard decline the pair stared to correct up. In spite of that, the moving averages and RSI didn't support a reversal in price, thus, we waited the price to break down the last low at 109.30 to go short.


As usual, you have to trade wise and not take any analysis as a guarantee, so you should use stop loss on any trade you open. On the example above you could place the stop loss above the last high.

    Trade Wise and Good Luck,

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