The dead-cat bounce in a cross

[Fairman]

The dead-cat bounce in a cross

After a sharp drop in a cross like GBPJPY, price often bounces a short distance and then resumes falling. Traders call it a dead-cat bounce, a pause that doesn't change direction.

In crosses, the pattern is common because of the way liquidity behaves. The initial drop is driven by forced selling and stops. A burst of buyers steps in, thinking it's a bargain, and pushes price up. When no fresh demand follows, the selling returns.

The bounce can be 30 to 60 percent of the drop. It looks like a reversal and has trapped many who tried to catch the bottom.

For scalpers, the bounce offers short entries at better prices than the initial drop. But identifying it in real time is hard. A genuine reversal looks the same in the first minutes.

Some clues: a bounce on declining tick activity suggests weakness. A bounce that fails to reclaim a prior level, such as the broken support, adds to the case.

The risk is a sharp squeeze that doesn't resolve quickly. Stops placed just above the bounce high are a common target.

Dead-cat bounce or true reversal: which signs tell the two apart on the pairs followed?