Dead Cat Bounce: A Complete Guide to This Investing Phenomenon

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. The phrase comes from the idea that even dead cats will bounce if they fall from a high enough point.

Dead Cat Bounce: A Complete Guide

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

As you’re probably well aware, the two main forces at play in economics are supply and demand 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

Lack of impulse control over greed and fear sets traders up for failure. Accept that you’ll never time the market perfectly — and that you don’t need to for success. This is why I’ve invested serious time and money into working on my trading psychology, which has improved my decision-making to no end during these crucial moments.

5. Small Rooms

Although the idea is to spend little time in your room, another thing to expect on your first cruise is a very small room. While you may be expecting a smaller room, most aren’t prepared for just how small cruise cabins are. A dorm room is probably the closest comparison.

The Great Depression

Following the initial crash in 1929, there was a 47% increase in stock prices from late 1929 right through to spring in 1930 — practically a full recovery. As you can no doubt guess, prices were soon to fall back with a vengeance and soon declined 80%.

Dead Cat Bounce Strategy

The first thing to be aware of is that every dead cat bounce is slightly different, so don’t expect a textbook example each time. You can’t assume that the market is experiencing a bounce just because there’s been a dip followed by an upswing — this could mean anything.

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