Dead cat bounces are a pretty common occurrence in the world of stocks and trades. They help can be a sign to run from a stock, but they could also be a way to make a lot of money with short trade stints.
So what can you do to start profiting from these dead cat bounces? It starts with identifying them and setting up personal fail safes on your investment.
Let’s take a look at 5 tips for profiting from a dead cat bounce.
1. Identifying the Dead Cat Bound
The first step is identifying the dead cat bounce in the market graph for your stock. A dead cat bounce happens when a stock hits a new low, but bounces back in a positive light. It can happen over months, weeks, days, or hours, but the point is a that is bounces back from new lows. So if a company is reporting a new low negative for a few weeks, bounces back and starts to gain profits, but then slips again and falls even harder. Your dead cat bounce happens after the first low into the raise. A second dead cat bounce can happen from the new low that appeared after the first positive results.
Pay attention to these bounces on your stock. They could be a great way to make money but they can also be the red flag that makes you sell.
2. Setting Parameters
If you choose to hop in on a dead cat bounce stock, you need to set up safeguards for yourself. Ideally, your goal is to figure out when to buy and when to sell. To do this, you can use your dead cat bounces to set up your stop loss. If you buy into a stock around $36 a share after it’s dead cat bounce at $35.50 a share, your ideal stop-loss would be around $36.50 a share. This makes sure you profit off the bounces without selling “early” and losing money.
So what does that mean? You always want to place a stop-loss just above the bottom of the bounce and no lower than what you bought in for. Keep in mind a 5-cent stop loss might make sense for a $5 or $10 share, but it wouldn’t make sense for a $200 share.
Targeting profits is a bit easier because it’s built from your stop loss number. The ideal ratio of risk/reward is 2:1. If your stop loss on the stock is set at that 50 cents above, your profit target should be at $1 below. This gives you time to ride out the lows in the hope for another bounce, but you still profit.
These numbers move with your stock as it moves up and to the right, so keep those base numbers and growth numbers in mind. As the stock moves up, the floor moves with it. Say that stock we talked about early made it up to $38 a share. Your new sell number should be around $37. If it keeps going up, awesome, keep riding it, but it if it dips again, you can sell before you lose money, and still profit from the small jumps.
3. When to Jump In
Dead cat bounces make it challenging to find the right time to jump in a market. They can be deceiving because of the nature of buying a dying stock. So when do you jump in?
Keep your eyes open for a falling pattern on a company that still has a lot to give. When you find a pattern that shows a long string of negative earnings, it’s time to get ready to buy in. With the first reports of positive movement in a short time period, it might be time to jump. Keep in mind that dead cat bounces normally come one after another. If you jump in on the first impulse, sell when you hit your stop loss, but keep an eye on the stock. It might hit another dead cat bounce, and you can jump back in to profit from the new bounce with more shares to profit on the next bounce. Just make sure you do your math to come out with a profit on your shares overall.
4. Cutting Your Losses
Attacking a dead cat bounce can be risky. Sometimes you don’t catch the right bounce, and the third bounce was the one that led to real profits. Sometimes you catch a bad bounce and the stock just falls. This is why it’s important to place the risk/reward factors on the stocks.
If it’s falling, don’t hold on until and watch your money fly away. Cut your losses and walk away with profits. This is a dangerous game you are playing, so be ready to cut losses to net profits, even if they are small.
5. Be Careful With Your Money
Although the idea of attacking a dead cat bounce in the market can seem really scary, it’s an amazing way to make big profits with quick moves. Remember this tactic can be done on a variety of different timelines, so don’t be afraid to try and make a big move in one day. With your securities in place and your goals clear, making a few hundred or a few thousand possible with the right moves.
If you are looking for a good place to look for a dead cat bounce to occur, start watching Nvidia’s stock pricing (NVDA). They are going through a massive fall off due to crypto currency stock falling, and a dead cat bounce is already showing signs of happening hourly. Since they are such a staple point in computer graphics, you know they’re about to come back with a vengeance. The question is, which bounce will be the big one?
Have you ever tried to make a trade on a dead cat bounce? What is your big red flag to abandon ship? What are your green flags to keep going? Share your thoughts in the comments below.