The rebound of a dead cat – what is it in trading?

Inertia allows an inanimate object to slightly rebound after hitting a surface. Stock traders attributed this property to a dead cat, which also has mass and inertia. This humorous concept has become popular and is still used in cryptocurrency trading.

Dead Cat Bounce

Can Dead Cat Bounce be Identified in Practice?

There is no simple way to identify a bounce before it happens. However, it has its own characteristics:

• The price of the cryptocurrency keeps falling.
• The cryptocurrency's price temporarily recovers.
• After the recovery, the asset falls even further below the previous low - the cat always returns to where it bounced from.
• The price drops by 5% or more and then starts to rise briefly.

Causes of Dead Cat Bounce

A bounce is usually the result of speculative day traders. These players start buying the asset in large quantities, expecting the price to recover. However, the buyers' interest is short-lived, and speculators soon sell even more actively, causing the currency's value to plummet again.

Another reason is a mass exodus from positions. The order book is filled with sell orders, and the mass execution of these orders leads to a short-term increase in the cryptocurrency's price.

Can Profit be Derived from such a Situation?

There are several ways to benefit from this phenomenon:

• Engaging in short-term intraday trades during the short-lived rise.
• Opportunity for a trader to take a short position.
• A psychological indicator that allows identifying panic sentiments in a bearish market.

It is not recommended for novice traders to trade during short-term bounces. After all, the bounce is dangerous precisely because it masquerades as a trend reversal. It is better to wait for a true reversal and then continue trading. The profits will be slightly lower, but the risks will be reduced.