Trading patterns is one of the most sophisticated trading strategies. It exploits the psychology of market participants, and takes advantage of the knowledge of market insights.If you want to use AI to discover these hidden effects, then Tickeron’s Pattern Search Engine is the tool you need. Using PSE, AI will teach you to recognize patterns and entry and exit points.
The Dead Cat Bounce pattern appears when a security's price falls quickly but has a temporary “v-shaped” recovery before resuming its downward trend. The temporary bounce (from point 2 to point 3) may be explained by shorters covering their positions or buying by investors who think the price has already reached a low point.
It is important to wait for the confirmation move, which is when the price breaks below the low where the dead cat bounce occurred (point 2).
If the price breaks out below the price where the dead cat bounce occurs, then day traders and swing traders should trade with a DOWN trend. Consider selling the security short or buying a put option at the downward breakout price level. To identify an exit, compute the pattern’s height by measuring the initial fall (from points 1 to 2). Then calculate the target price by subtracting the pattern height from the breakout price level. When trading, wait for the confirmation move prices falling below the breakout level.
To limit potential loss when price suddenly goes in the wrong direction, consider placing a stop order to buy back a short position or sell a put option at or above the breakout price.