What is a Dead Cat Bounce?
Dead Cat Bounce
Forex Trading Glossary
Quick Answer: A dead cat bounce is a brief rally within a strong downtrend that quickly fails as sellers regain control.
What is a Dead Cat Bounce?
A dead cat bounce is a temporary price rally within a larger downtrend. The bounce often lures traders into believing a bottom is in place before the decline resumes.
Characteristics
- Sharp preceding drop: The bounce follows a steep sell-off.
- Short-lived recovery: Gains fade quickly.
- Low volume: Participation is weak compared with the prior decline.
- Fundamental weakness: Macro backdrop remains bearish.
Protect Yourself
Avoid chasing the first bounce after a major sell-off unless other evidence confirms a genuine reversal.
Trading Approach
- Wait for confirmation: Use trendline breaks or higher lows before turning bullish.
- Fade the bounce: Short at resistance with tight risk parameters.
- Monitor catalysts: Watch for news that could shift sentiment sustainably.
- Scale sizing: Downtrend rallies can be violent; keep position sizes modest.
Related Terms
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