It is necessary to know and recognize all the classic patterns to make a profit. The market is extensive, and the technical science is infinite. But one of the most important parts is the classic patterns.
In the previous articles, I explained some classic patterns, such as reversal and continuation patterns, and today I want to define an interesting and essential pattern for you. Its name is a bit strange, but you shouldn’t judge a book by its cover.
In the picture below, you can see a cute cat that had a bounce. But don’t worry because this cat is alive and well.
This pattern is one of the mysterious patterns in the market. Its name is dead cat bounce. Isn’t it strange? Well, yes, it is a bit odd. Of course, not only is his name strange but also what he does is interesting.
Wall Street investors defined this pattern in 1990-1998 and chose this funny and strange name for it. They used this term when some companies’ stocks fell.Well, I gave you a clue: Falling the stock price!
I will explain all its details in this article so that you can learn and recognize it correctly in the chart. You need to read this article carefully and practice all the points.
I made a profit of 20,000 dollars using this pattern in the bearish market of cryptocurrency in 2022. I suggest you learn this pattern to fill your pocket with money in the bearish markets.
Dead Cat Bounce Pattern
The dead cat bounce is a continuation pattern. This pattern appears in downward trends with high momentum.
Contrary to its strange name, it is not about a dead cat and indicates a continuation of the downward trend. This pattern can save you and bring you a lot of profit when other traders lose money.
Why do we call it the Dead Cat Bounce?
Well, a proverb in English says even a dead cat will bounce if you drop it from high enough. I hope you never see this scene or even imagine it.
Where does Dead Cat Bounce form?
It occurs in downward trends with high momentum. Let’s simplify it a bit. When the value of a stock or a currency falls, this pattern appears in the chart of the price of that stock or currency in a downward trend.
The dead cat bounce pattern can form at the lowest bottom that the price has formed in its history because traders consider this area to be a strong support zone and enter the market, which causes the price to bounce slightly.
This pattern also forms at round numbers because these numbers affect people’s psychology and act like a support zone.
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Why does a Dead Cat Bounce form?
When the price experiences a sharp fall, traders feel that the price has reached the lowest support area and is worth buying. In this area, they start buying, and the price increases with a lot of momentum.
But this cat is dead and cannot have a total bounce to go up; it’s just a dead cat bounce.
In this area, the stock or the currency has lost its value, and this bounce occurs only for psychological reasons among traders, and there has been no change in the value of that stock, etc. So the price has no reason to rise.
In this bounce, the buyers get extremely hopeful and enter the market, but they need to know that the cat is dead and cannot bounce. After this slight bounce, the price falls down with the same momentum as it has risen and goes down.
How to recognize the Dead Cat Bounce?
The dead cat bounce is a bit vague and complicated. But I will show you the way so that you can find it easily and make a profit with it.
Some traders believe that they can recognize this pattern only when it is completed, and there is no way to identify it while it is forming. But I know some exciting methods you can use to recognize this pattern and have a more accurate market analysis.
The first method is to use fundamental analysis to know that the trend is downward and the stock or currency has lost its value. For this, you should read and analyze the news; if the information about that stock or currency is still negative, there is no reason for the price to rise.
This pattern forms when the fundamental news confirms the depreciation of the stock, but chart analysts believe the market is bullish based on a sudden rise. So we must follow the news and learn fundamental analysis. One of the ways to know if this cat is dead or alive is to use indicators and market volume.
In the following articles, I will teach you indicators such as RSI, MACD, and other trend detection indicators, which you can use to determine whether the price is still in a downward trend or returns and enters an upward trend. In the photo below, you can see an example of this pattern on the EURUSD chart:
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Trade on the Dead Cat Bounce
It is not easy to trade on the dead cat bounce, and we have to be careful. But If you read this section completely, I promise you that you can get huge profits from forming this pattern.
Well, trading on this pattern has specific rules that you can learn. As I said, at the time of the formation of this pattern, we cannot say with certainty that the dead cat bounce pattern is forming.
We can identify it after its completion. There are several ways to trade on this pattern; please notice that I have reached these results with years of experience and backtesting, and I will teach you so that you can make a lot of profit from this pattern.
The first method
You can use Fibonacci Retracement. This tool is used to detect retracement levels. And by combining this tool with various indicators, you can find a strong resistance zone. By finding the most substantial resistance zone, you can place a short position as a limit order and set the stop loss above the resistance zone or the Fibonacci level.
Or you can wait to see a bearish reversal candlestick pattern in the resistance zone to receive more signals. For example, when you see a shooting star candle, you can place a short position after forming it and put the stop loss above the candle or the resistance zone.
The take profit in this pattern equals the distance from the last major bottom to the highest price of the bounce. In simpler words, it equals the vertical size of the dead cat bounce pattern.
The dead cat bounce is a strong continuation pattern, and you can close half of the position at the price of the last bottom and close the rest of the position at twice this size and take your profit from the market.
We can combine this pattern with other continuation patterns, such as symmetrical or flag patterns, and obtain the take profit size for other patterns to make a profit in the dead cat bounce pattern.
The second method
You can find retracement areas based on Fibonacci and use the moving average indicator. But how? If the price hits the moving average, which has already played a strong resistance role in the chart for the stock or currency, and at the same time this happens on one of the Fibonacci levels, it makes a good area for a short position, and you can enter the market at this price.
The stop loss in this method is located above the resistance zone or above the moving average line. Your take profit can be equal to the size of the bounce, that is, the distance from the last major bottom to the last major top.
You can keep the position open until the second target or withdraw half of your profit in the first target and withdraw the second half in the second target.
The third method
In the third method, you can enter the short position after completing the dead cat bounce pattern when the price passes the price of the last bottom by a valid breakout candle.
You can place the stop loss above the breakout candle or the last minor pivot. One of the take profit points can equal the distance between the last bottom and the last top.
You may have heard the name Luna. The Luna coin crash was caused Due to the connection of this token with UST. It was a token in the Cryptocurrency that experienced a fall. Over $2 billion worth of UST was unstaked (taken off the Anchor Protocol), and hundreds of millions of it were quickly liquidated. At this fall, all bounces and pullbacks were considered dead cat bounces.
Because this currency had lost its value, it should not have risen. All these small rises gave hope to buyers, and this caused the loss of many traders’ capital. It is a sad event. Well, be with me so that these tragic incidents do not happen in your life.
The most important thing you should do is to analyze the news of the cryptocurrency world or any market you work in and stay up to date. Many traders went bankrupt this fall, but I made 15,000 dollars of profit using the dead cat bounce pattern. My fundamental analysis was the only reason for this profit.
I knew that this cryptocurrency would fall. But many did not know. Look at my trades on LUNAUSDT in the 4-hour time frame:
When the price made this bounce, I knew it was just a dead cat bounce, and the price would soon experience an unprecedented fall. So I used the Fibonacci tool to find retracement areas. Well, the second step was to find the support and resistance zones.
At one point, the 50% level and the resistance area overlapped, creating a strong resistance zone. So I identified a vital resistance area and placed a short position below the 50% Fibonacci level as a limit order. My stop loss was above the 0.618 level because this level is one of the most potent Fibonacci levels and above the resistance area, so I decided that this is an excellent price to place the stop loss.
I knew Luna would have an intense fall. So I withdrew a third of my profit in the first target, which was the size of the bounce, and placed the second target at lower prices. I got huge money from this position. Luna’s project ended up being worth almost zero.
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Is the Dead Cat Bounce pattern continuation or reversal?
This pattern is a continuation pattern.
In which trends does the Dead Cat Bounce pattern appear?
In downward trends.
How to profit using the Dead Cat Bounce pattern?
By combining indicators and other patterns with the dead cat bounce.
In which markets we can benefit from the Dead Cat Bounce pattern?
In two-sided markets only.
What does the Dead Cat Bounce pattern tell us?
The downward trend continues, and the price cannot rise.
In this article, you quickly learned one of the most complicated patterns. I tried to tell you all the essential points. Some of these points are the result of years of experience. Try to check the critical economic news when the market falls sharply, and only enter the position after knowing the reason for the fall.
Be sure to put a stop loss on the position because, in some cases, the market moves with high momentum, contrary to our analysis, and you will probably lose. So it is better to stop this loss somewhere.
Capital management is one of the essential topics to ensure your profitability. Remember it and try to know your personality and design a capital management plan according to your personality. Thank you for being with me on this article.
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