How to profit from a dead cat bounce in 5 steps

Published February 27, 2019   |   

Opportunities to make money on the stock market are everywhere, especially when you know where to look. Big profit buys, steady growth stocks and penny stocks to ride to the top are always the common go-to tactics for making your money through the market.

Sadly, there are major money makers that are often overlooked due to their high-risk/high-reward nature. One of those high-risk/high-reward moves is the dead cat bounce. Although it’s challenging to profit from, a dead cat bounce, it’s possible to make money if you know what you are doing.

To help you profit from a dead cat bounce, we are going to look at 5 steps to take when you qualify a dead cat bounce. Let’s take a look at how you can make money on dead cat bounces.

Step 1: Identify the dead cat bounce

First thing’s first, you have to identify the dead cat bounce in the market. So, what is a dead cat bounce? It’s typically seen a large fall in a stock price over a long period of time followed by 3 small false jumps before a small climb back up in price.

When you are looking for these dead cat bounces, you can look for them on a variety of timeframes. They could be times frames of days, months, or more if you really want to do that.

Keep in mind that these bounces won’t typically go back up to the previous pricing levels, so you have to be ready for the bounces to not go your way.

Step 2: Set limitations

To avoid devastation from a bad investment in a dead cat bounce, it’s important to set a floor for your investment. This floor is typically a little bit above the last previous bottom out in stock price. Since you want to buy into the bounce just about above the last bottom out point, you shouldn’t let your per stock price dip below it. That being said, the thresholds for your safety nets really come down to the price of the stock at the time. A $2.00 stock shouldn’t have the same threshold as a $230 stock. The larger stocks should have larger safety nets.

You need to watch the volatility of your stocks too. If your bounces are happening in larger numbers at faster rates, you might want to set ceilings too. Since the stock is so volatile, it could make you large sums of money one day or ruin you the next if you aren’t careful. If you have an ideal ceiling to sell it, you can make your money can move on. If it keeps going up, oops, but if it drops you look like a genius. To make the most of a dead cat bounce in general, you should try to set a ceiling around the bottom of the initial fall if you can. You could also try tactics like doubling or tripling the profit of the floor, or you could set a target sell point. It really comes down to what makes sense for the stock at the time.

Step 3: Budget and buy

Now that you have put your eyes to the test and identified your dead cat bounce, it’s time to set your budget. Is there a minimum buy for float shares? If so, you need to make sure you have the funds ready to go.

Now that your funds are ready to go, you should buy, right? Well, if you have watched the dead cat bounce from the start, and you start to see the string of good days roll in, yes.

Step 4: Know when to leave

Knowing when to get out of the dead cat bounce is just as important as knowing when to hop back in. Since you know the stock price for your buy has been going up and down over a period of time, there are typically two good ways of going about your cash out. The first we already talked about a bit, the ceiling. If you set that ceiling at the bottom of the last bounce, you can typically ride each dip back to that number or get really close. You really have two choices when you hit the ceiling. You can sell it and make your money, or you can keep riding the wave until the first sign of rough waters.

So, what do you get with both choices? Potential good and potentially bad for both.

If you choose to sell, you could make you a bit of money as you intended from your dead cat bounce situation. If you hit that ceiling and sell, you make that money. Good. If that stock keeps growing and growing after you sell, you just lost a ton of profit potential. If you go this way, you will make money, but you might miss out on future money depending on the market.

If you choose to hold on, you could ride that huge wave we just talked about. The other side of holding past your ceiling is the potential for losing money. Let’s say you have ‘a good feeling about this one,’ but you are feeling isn’t based on the information. You choose to hold on and ride out beyond your ceiling. Unfortunately, the next day leaves you below your ceiling and ends the day closer to the floor you set. Whoops, that’s a missed opportunity to sell sooner and make more.

Step 5: Stay up-to-date on dead cat bounce options

There is a simple way to really help yourself decide whether you should sell or hold. Take the time to do a bit of research on your investment in the current news. Try to find any and all information pertaining to your investment in the real world. If they are making moves and partnerships, you might want to keep holding for a bit if their partners are doing well. If their industry as a whole isn’t doing well or they are the forefront of a huge scandal, selling is most likely the way to go.

Just use your best judgment when it comes to holding or selling. If you are concerned about the potential for losing money, just always stick to your floors and ceilings.

You can make solid profits from a dead cat bounce

If you really attack dead cat bounces as small profit makers, you can really turn it into a profit generation method. As you start to build your account from dead cat bounce to dead cat bounce, you will start to control more potential for shares. More shares mean more profit potential, so building over and over can really boost your profile.

There is some risk to be had with dead cat bounces. If you buy in too early, you are just going to lose money. If you buy in too late, you aren’t really making as much as you could from the venture.

If you are worried about putting your money on a dead cat bounce, simulate it. Watch a couple of stocks that have dead cat bounce potential. Once you have those, write down how much you would have bought. Watch the progress and write down your share value when you would have sold. After you do a couple of those, you’ll be ready for the real deal.