Dead Cat Bounce Chart Pattern

 Continuation Pattern
ike any other market, forex makes some really nice swings in price, which when identified can give you an opportunity for an excellent trade, notes Pete Southern of LiveWire Market Blog.

Swing trading is the art of catching a changing trend and riding it out in the other direction or “swinging” for use of a better phrase! The key to being successful with swing trading is to have a solid method for picking direction changes. There are various ways to do this but for this article I will cover my own favorite. It comprises of a few steps, but by following each one you can be more certain the patterns you are looking at will work out.

Identify Support or Resistance
First and most importantly, you cannot swing trade forex properly unless you can identify clear areas where the price may react from. This is how the big boys play the game, and if done correctly, it can show you excellent areas to watch for entries.

Draw some horizontal lines on your charts. Connect some previous highs and lows. Look for areas where the price has reversed a couple of times in the past, highlight them with a horizontal line and leave them on your chart. These will form the blueprint for your swing trading.


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Obviously as time progresses and the more often these lines have been tested in the past, the stronger and more important they become. What you should be looking for is an area that has been tested at least twice, and if it’s within a larger range (like the middle line above) then tests from both directions for support and resistance is essential. These are the areas at which you will be looking to trade from.

Now there are some traders who will just go shorting into resistance or longing into support. In my opinion this is a hit and hope strategy. You will be undone time and time again doing this, and even with good money management, the strain on your emotions will eventually take your edge.

Once the price is heading into one of these areas, it is time to drill down onto a shorter timeframe chart and start watching the patterns.
Appearance : An shallow upward bounce and declining price immediately indulging in steep decline.

Typical Duration : 2-4 days to the initial decline. Given by a few days as much as 3 weeks to the bounce high to become reached. A couple of days to a couple of weeks to the drop below initial decline low. As much as 3 months to the final decline to play out.

Description : We‘ll describe the pattern when it comes to a decline for simplicity's sake, but please bear on your mind that inside the forex there isn‘t any bias, and hence chart patterns work equally well in both directions. The logic behind this pattern is fairly simple. There was an unexpected event that caught the marketplace off guard, and resulted in an abrupt sell-off from the base currency against the quote currency. When the selling subsided, many market participants made a decision to take profit on the short positions, and a few perhaps even entered long positions inside the hope the event that caused the sell-off would somehow be mitigated. This causes a bounce in price, but once shorter term players who took profit are done, the buying dies down again and also the sellers take over, causing yet another drop well beyond the previous low.

Initial decline normally 20% or even more ;
Second decline continues another 15% coming from the bottom from the initial decline ;
Total decline between 30% and 40% ;

It ought to be noted the larger the initial decline, the wider the bounce, because of more market participants being caught short and getting squeezed from their positions. The quicker the initial decline, the quicker the bounce too. The entire picture is reminiscent of the bouncing ball.

Strengths : The dead-cat bounce is among the highest probability chart patterns you‘ll run into, particularly when the initial decline is steep and deep. The probability of the false break-out below the initial decline's low, referred to as l.

Weaknesses : From the time the dead-cat bounce occurs, you‘ve got already missed the meat from the decline.

How you can Trade it :

There are many methods to trade this pattern

Type 1 :

Await bounce to round as well as then short-sell the pair.
Price is predicted to decline to a minimum of the previous low made from the sharp initial decline. Partial profit could be taken here.
In many cases, price will continue downward, approximately 15% beyond the initial decline's low. A big support level during this approximate area is normally a very good spot to exit the complete short position.

Type 2 :

Wait for any breakout below the initial decline's low. A daily close below this level is normally considered a confirmation of breakout. Waiting to the breakout adds to the success rate from the trade, but decreases the quantity of gain when the trade reaches your target.
Place take profit target near a big support level found close to the 15% decline point, as measured coming from the initial decline's low.

Both Kinds of trades have their advantages and disadvantages. Type 1 trades possess a slightly lower success rate, but could possess a far better reward : risk ratio, while Type 2 trades produce a slightly higher success rate at the price of less reward : risk ratio. Taking both into account, Type 1 trades provide a better overall expectancy, but traders may choose Type 2 if using other confirmation factors which further enhance the Type 2 probability or R : R ratio.

Even though you do not trade the dead-cat bounce, It‘s strongly recommended which you avoid all bullish formations for the following 6-12 months, as they simply normally either fizzle out or produce below-average gains, and in many cases pushing your expectancy into negative territory.