The term refers to a phenomenon that occurs during a market downturn. A dead cat bounce is a short-term recovery in the price of a crypto asset, after which the value falls even lower.

Inertia allows an inanimate object to slightly bounce after hitting a surface. Stock traders attributed this property to a dead cat, which also has mass and inertia. This humorous concept caught on and is still used in cryptocurrency trading.

Dead Cat Bounce or Dead Cat Bounce

Can You Identify a Bounce in Practice

There is no simple way to identify it; a bounce is usually determined after it appears. However, it has its own characteristics:

• the price of the crypto asset is constantly falling;
• the value of the cryptocurrency recovers for a while;
• then the asset declines even more and falls below the previous minimum — the cat always returns to where it bounced from;
• the price fell by 5% or more, after which it began to rise in the short term.

Causes of Dead Cat Bounce

The bounce is usually a result of trading by speculative day traders. Such players begin to buy the asset en masse, expecting that the value will recover. However, buyer interest is too short-term; speculators soon sell even more actively, and the currency rate collapses with renewed force.

Another reason is the mass exit from positions. The order book is filled with sell orders, the mass execution of which leads to a temporary increase in the cryptocurrency rate.

Can You Profit in Such a Situation

There are several ways to benefit from this phenomenon:

• conducting short intraday trades during short-term growth;
• an opportunity for a trader to take a short position;
• a psychological indicator that helps identify panic sentiment in a bear market.

Beginning traders are not recommended to trade during temporary bounces. After all, the bounce is dangerous precisely because it masquerades as a trend reversal. It's better to wait for a real reversal and only then continue trading. The profits will be slightly less, but the risks will also be fewer.