In today’s day trading tutorial we will discuss the very effective ‘Dead Cat Bounce’ Pattern.
The ‘Dead Cat Bounce Pattern’ is a very simple and effective way to trade news events or fast-moving markets that are too difficult to chase.
One of the most enticing trading opportunities for day traders occur after economic news events because they move price-action dramatically in a very short period of time.
Professional traders can profit from fast-moving price-action after a news event by using the Dead Cat Bounce Pattern.
Day Trading Economic News: The CHALLENGE & RISKS
Every new day trader will try to catch a market that is reacting to news, but after trying different techniques of entry, most new day traders find that chasing economic news is extremely challenging, and because of the lack of liquidity it can be VERY dangerous as well because of the possibility of getting into the trade at a much higher/lower price than desired.
Trying to chase after news events is VERY dangerous for a trader because of the risk of slippage on the entry price along with unexpected market conditions.
Day trading the Dead Cat Bounce Pattern has Five (5) simple steps:
(1) One, we wait for a large, fast-paced move in the price-action on your chart, likely after news is released, or the opening-bell rings.
(2) Two, rather than chasing after a trade, trying to get into the trade while the price-action is moving so quickly, stay patient and wait for the price-action to calm down and then start to retrace back in the opposite direction.
(3) Three, pay close attention looking for a 50% retracement of the move that occurred after the news was released.
(4) Four, look for an entry opportunity going in the same direction as the first move that was too fast for you to catch the first time around.
(5) Five, we place our stop-loss just above the 50% retracement and our profit-target at the 100% extension of the prior move down.
Example of Day Trading the Dead Cat Bounce Pattern:
You are watching Crude Oil Futures move lower on your chart when you hear news released that there is more supply available to consumers because of a new pipeline that has opened.
You are now certain that Crude Oil Futures are going to move lower, but the price-action is moving SO FAST that you are afraid of entering the trade because of the possible slippage on the entry price.
You are very wise to wait patiently after the news is released, looking for the ‘Dead Cat Bounce Pattern’ to appear on your chart.
You wait for the price-action to retrace off the new lows by at least 50% of the move down, and when it begins to move lower once again your enter the trade short.
Your stop-loss is 2-ticks above the highs of the retracement and your two profit-targets us the low of the move down at (B) and the 100% extension of the move from (A) to (B) down at (D).
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