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Day traders should watch for this. Watch for the price to rally back into the vicinity of the open price. This is once again a guide. Take a short position only once the price starts to drop again. By waiting for the price to start dropping, after nearing the open price, the day trader has more confirmation it actually is a dead cat bounce.
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Set Average Volume to at least , or 1,, to assure all the stocks generated on the list have adequate volume for day trading. Dead cats that bounce eventually return to where they bounced from. While no strategy works all the time, if the price respects the open and declines off of it, it will often retest the low price created before the bounce morning low.
Therefore, the initial price target for the short position is just above the prior low. Ideally, exit part of the position there. If the price starts to rally again, exit the rest of the position. Or, if the price breaks below the low of the day, hold onto the remainder of the position and exit at the first sign of a bounce. A tight trailing stop works well in this situation. Mainly, the stop should be out of reach of normal fluctuations, yet still, keep risk controlled and allow the profit potential of the trade to outweigh the risk. Shoot for trades that offer at least a reward to risk ratio.
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Day Trading Trading Systems. By Cory Mitchell. What if you are actually short selling a stock, which has put in a significant bottom and ready to make a strong move higher. When these reversal moves occur, they are sharp and fast. This pain of course can intensify itself if you are trading on margin.
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It will definitely start dropping again! Now what? A simple continuation trade will lead to enormous financial and emotional pain. This sharp counter move higher all took place in less than an hour!
Watch out for ‘dead cat bounce’ in stocks because there’s more pain ahead: Morgan Stanley’s Wilson
For this reason, you will always want to place a protective stop loss order when trading the dead cat bounce. The correct location for your dead cat bounce stop loss is above the peak created during the bounce. Since this might confuse you, I will show you where your stop loss should be in the previous trade demonstrations:. When you discover a dead cat bounce pattern, you should aim for a minimum price move equal to the previous trend impulse. In other words, if the price starts dropping suddenly and you confirm a dead cat bounce pattern afterwards, then you should expect the price to drop at least with the same size.
Have a look at the below example:. Yahoo starts with a strong bearish trend. Suddenly, a dead cat bounce pattern appears on the chart. The stock price attempts to pick up, but then it breaks the level of its last bottom, which leads to impulse 2. Since the target for a dead cat bounce is the size of the prior range, we simply add this to the low that is broken. As you can see in the above chart, we have highlighted where the pattern completed and you should book your profits.
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Now that we discussed all the important rules regarding the dead cat bounce, I will now show you a real trading example with this chart pattern. We will apply the rules we discussed above in order to walk you through the trade.
This is the 3-minute chart of Nokia from April 29, The image illustrates the steps of the dead cat bounce trading. Now, we need to see if the price is going to complete the last step 8 by reaching the minimum target of the pattern. After the price confirms the dead cat bounce pattern, the stock continues to trend in a bearish direction.
When we apply the size of the first impulse over the second impulse which we are trading, we are able to identify a minimum target. As you see, the price completes the minimum target less than 25 minutes after the pattern is confirmed.
Dead Cat Bounce Definition
At the same time, our trade is constantly protected by our stop loss order. It is important to emphasize that timing is crucial when trading a dead cat bounce. Therefore, make sure you short the stock exactly in the moment when you see a candle closing below the last low of the stock. Want to practice the information from this article?
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