October 21, 2017

Beware Of The Dead Cat Bounce When Attempting To Pick A Bottom

One of the biggest challenges faced by day traders when evaluating a candlestick chart is to detect whether or not the true bottom has been established or if what is being witnessed is essentially a dead cat bounce. Let’s take a step back and explain some of this terminology just in case you’re not familiar with it.

Candlestick charts are a essentially a style of bar-chart used primarily to graphically represent price movements of a security, derivative, or currency, over certain period of time. Candlestick charts are a combination of a line-chart and a bar-chart. A candlestick chart “bar” represents a range of price movement over a given time interval. Candlestick charts are basically a visual aid for traders to help when it comes to making a decision.

A dead cat bounce is the term used within the world of technical analysis to describe a scenario wherein a short-term pocket of momentum appears to be the point at which an underlying investment vehicle has bottomed out. However, this bounce in price oftentimes does not last. That’s why it’s referred to as a dead cat bounce. Once the pocket of momentum is extinguished, the price drops back and stays down.

Needless to say, acquiring the knowledge and skills necessary to successfully pick a bottom when using a candlestick chart requires a lot of time and patience. However, one relatively simple trick that you can start using right away to help you avoid a dead cat bounce is to look at the amount of volume that accompanies the pocket of momentum that shows up on the candlestick chart.

In the overwhelming majority of cases, a dead cat bounce will not be accompanied by heavy volume. In addition, the price will typically close near the middle to bottom of the trading range for the day. What you ultimately want to see is some confirmation within the candlestick chart that a true bottom has been established.

The reason why so many inexperienced traders fall into the trap of buying into a dead cat bounce is because they are fearful of missing the bottom. In essence, these individuals lack the patience that more experienced traders have developed over time.

To the extent you happen to be somebody who is seriously interested in learning more about candlestick charts, you definitely owe it to yourself to invest the time and money necessary to acquire the knowledge and skills that will give you the edge you need when making trades.

Don’t make the mistake of assuming that you can learn everything that you need to know about candlestick charts on your own. Save yourself time and money by investing in a high quality candlestick chart course. You’ll be really glad that you did — and the results will show in your trading performance.