Dead Cat Bounce: A Complete Guide

The idea of a “dead cat bounce” might sound somewhat alarming, but as long as you hear it mentioned within the context of trading, it refers to a particular phenomenon in the stock market

Why should you care? Because, by following backtested trading strategies, you can use them to make a profit.  

What is a Dead Cat Bounce?

When a stock price decreases, it rarely just hurls straight down without experiencing a few peaks along the way. One extreme example of this is the dead cat bounce: when a stock price decreases, it may seem to undergo a slight recovery before returning to its previous low.

What are the Causes?

A bounce happens when pessimism begins to set into a bear market. If the market continuously displays a downward trend for weeks on end, the conditions for a bounce begin to foster — and it’s made possible by the way different types of traders act.

The Economics at Play

In the case of a bounce, the supply force is made up of the investors who are shorting, while investors drive demand because they believe the stock price is about to increase.

The Market Psychology

In retrospect, the route to profiting from bounces appears clear as day. So why do so many traders get burned by them instead of profiting? It’s partly because they’re blinded by short-term movements (the bounce) to notice the broader trends, and partially because they haven’t mastered their emotions related to their investing decision

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