The Dead Cat Bounce pattern is similar to the Bull Trap, which often leaves many traders trapped and losing money. However, it is also an opportunity for traders to find potential Sell orders. Therefore, you need to understand its meaning so that you can make money with the correct decisions. To understand what Dead Cat Bounce is? How to recognize and deal with it? We invite you to follow the article below.
What is the Dead Cat Bounce pattern?
The Dead Cat Bounce is a continuation pattern that occurs during a downtrend. It usually appears after the market has bad news that causes the price to plummet. When the price drops down to a certain point, the market bounces, making traders think that the downtrend is over. But it was just a hopeless bounce, the price will still go down in the original direction in the end.
Features of the Dead Cat Bounce pattern
Identifying the Dead Cat Bounce pattern on the chart is extremely important. That will help traders avoid the market price traps that lead to losses. To identify this pattern, traders can rely on the following features
- Dead Cat Bounce appears in an obvious downtrend. When the sellers completely dominate the market, the following highs/lows are always higher than the previous ones.
- Next, the price suddenly increases sharply, causing many traders to believe that it was the bottom and begin to rush to execute Buy orders.
- Finally, the price falls sharply again. At this time, investors who “fished at the bottom” before the upward correction already made some profits and decide to close the order soon for fear that the downtrend is still strong. Therefore, the recovery span is short and the market continues to plunge strongly in line with the old trend.
Meaning of the pattern
Dead Cat Bounce is a pattern preferred by both traders and funds. Short-term traders can profit from this small bounce. Long-term traders or hedge funds may open a short position when there is a good chance that the price will reverse temporarily.
Short recovery periods can be interspersed with downtrends. This is the result of traders or investors closing sell orders or opening buy orders when the price bottoms out.
The pattern appears quite frequently in a recessionary economy. Or this pattern could also be reflected in shark interference.
How to trade with the Dead Cat Bounce Pattern
As mentioned above, traders can fully utilize it for short-term and long-term trading. I will share the strategy in detail below.
Step 1: Identify the pattern
The Dead Cat Bounce appears only during a strong downtrend. Traders need to wait until the price breaks the old bottom and bounces off creating a short-term recovery to confirm a successful pattern. If the old bottom is not broken, the pattern is not formed.
Step 2: Enter the order
For short-term trading, traders can take advantage of bullish trades when the price touches the support level. The way to enter the order is as follows:
- Entry point: The green candle at the support level that the price just popped up.
- Take Profit: Place it at the nearest resistance level or potential R:R ratio.
- Stop Loss: Set 1:1 with taking profit because this is a short-term trade.
For long-term trading
Dead Cat Bounce is a downtrend continuation pattern so traders trade long-term with bearish order. But to reduce risk, traders should use more indicators such as MACD, MA, and RSI… to confirm the signal.
- Entry point: when the price breaks the lowest low of the previous swing.
- Stop Loss: Above the newly created peak area. It also coincides with the important resistance level of the downtrend.
- Take Profit: Usually, if the pattern bounces strongly, then the price will plummet. So traders can choose the R:R ratio of 1:2 (loss/profit) or based on the key Fibonacci milestones.
The article has shared all details of the special pattern – Dead Cat Bounce. Hopefully, through the article, traders not only have one more way to avoid the Bull trap but also can take advantage of this pattern to execute potential orders. In addition, when trading with this pattern, traders need to follow the rules of capital management to ensure the safety of the trading account.
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