What is Dead Cat Bounce?

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Dead Cat Bounce (Dead Cat Bounce) is a price model depicting the phenomenon of a market rebounding after a long period of plunge before continuing the old trend. Trading in this model is a trend trading. The model is quite popular in the market especially after the market has strong news. Therefore, if you know the rules of trading with Dead Cat Bounce, you can get the correct entry points to create opportunities to make money. In the following article, we will show you how to determine the Dead Cat Bounce model on the chart and how to trade it to achieve the highest efficiency.

What is Dead Cat Bounce?

Dead Cat Bounce is a continuation price pattern that appears in the downtrend. This pattern appeared after the market had bad news that caused the price to plummet. When the price plummets to a certain point, the market bounces but is just a hopeless bounce, the price will eventually go down as the original direction.
A bounce in a strong downtrend will create a V-shaped shape as shown above.

Features of Dead Cat Bounce

To identify the Dead Cat Bounce model you first need to identify the right trend. The initial trend must be a sharp fall down. After that, the bouncing price changed the direction of the market movement. Finally, prices continue to fall and break the previous previous bottom, the pattern is formed.

As you can see in the picture above, at first the price goes down, then bounces at point 2. Here we draw a straight line to the right. Only when prices fall and break through this black line will the Dead Cat Bounce model be officially created.

Actual example of the Dead Cat Bounce model

Here is an example of the Dead Cat Bounce model. As you can see on the chart, the main trend here is to decrease, not only that it will decrease sharply. The price then rebounded in the short term and then dropped, continuing the trend. That is the Dead Cat Bounce model.

Guide to trading with the Dead Cat Bounce model

Entry point command

As we said earlier, the Dead Cat Bounce pattern is only confirmed if the price breaks down to the bottom, which is a bounce. If the price fails to break above that level, then the Dead Cat Bounce pattern is not established.
This is a bearish continuation pattern so we will enter the sell order here. Entry points appear when prices break to the previous low. The entry speed here is very important because in the Dead Cat Bounce model, the price decreases quickly and sharply, if you do not observe and follow the price movement, you will miss a good trading opportunity.

How to set a stop loss (Stop loss)

It is extremely important to set a stop loss because the truth is that in the forex market, nothing is 100% certain and you need to protect yourself to be able to go longer on this market. Taking this position, the figure below fully shows the characteristics of a Dead Cat Bounce model, including: a strong downtrend, a bounce and a break below the previous bottom. If in theory, the price will drop, right?

But the truth is…. This is what goes on after that

Market sentiment has suddenly changed, plus the good news in the market, causing prices to go up far away. If you do not set a stop loss in this case, your account will probably be quite a deficit. So where should we put the stop loss in the Dead Cat Bounce model?
The answer is to set a stop loss at the highest retracement level in the pattern as shown below.

How to take profit (Take profit)

Profit-taking point is also very important, if we set our profit-taking point, we will gain profit in a safe and secure manner. The profit taking range of this model will be equal to the distance that the price has reduced earlier. That is, you must determine before the Dead Cat Bounce model takes place, from which point the price drops. Measuring the distance from that point to the bouncing point of the model, we have a take profit range. You can see the illustration below.


Paradigm Dead Cat Bounce is a continuation of a downtrend. This method of trading is somewhat similar to the Fibonacci retracement method. Remember we only point to a sell order if the price breaks down to the previous bottom and must set a stop loss, take profit fully. Good luck!

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Author: Tin Nguyen

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