Using the "Dead Cat Bounce" to invest

[Ecom man]

I have been investing in the stock market for over 10 years. Put some in mutual funds, actively traded stocks etc. Most of the investments have been losses or some complete losses (GM and Circuit City were 2 investments that didn't turn out so well.)

I have started using the investing method termed the "Dead Cat Bounce". Basically it is investing in stocks that have dropped a lot in one day. I tweak it a little and don't invest in drug stocks that have tanked or in micro stocks with no volume. I have used a specific formula of which loser stock to invest in and so far I am up about 20% for the year.

I was just curious if anyone else has used this sort of stock investment strategy and if you had any tips, tricks, or horror stories.

 

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[Sowexly]

This sounds like calculated gambling which isn't a bad thing to supplement goals I just feel that getting side tracked by this hurts a primary obsession that would yield a better and far more controllable outcome.

 

[townhaus]

have you back-tested this idea?

 

[GlobalWealth]

Sounds like you should consider some technical analysis training. The "dead cat bounce" concept is well known, but you should be a bit more knowledgeable about it as a trading philosophy.

Many stocks can trade in this technical pattern, but it is not a good idea to use this solely as your method.

Mainly you need to consider risk minimization as a trader. You could conceivable lose 75% of the time and still make money as long as you have a good system for limiting your losses.

 

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[biophase]

Are you buying stocks outright or options before this bounce?

 

[Ecom man]

Are you buying stocks outright or options before this bounce?

Buying stocks outright.

 

[Ecom man]

Sounds like you should consider some technical analysis training. The "dead cat bounce" concept is well known, but you should be a bit more knowledgeable about it as a trading philosophy.

Many stocks can trade in this technical pattern, but it is not a good idea to use this solely as your method.

Mainly you need to consider risk minimization as a trader. You could conceivable lose 75% of the time and still make money as long as you have a good system for limiting your losses.

Everyday i check the stock lists for the one that has dropped the most for the day. I look for a stock that has dropped around 50% that day but for all the right reasons.(bad earnings came out etc.) The stock had to have a volume higher than 1 mil on that day. I don't buy drug companies at all. I put a trailing stop loss on the stock as soon as I buy of 5-10%. I don't buy stocks that are currently trading below $5 a share.

 

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[Ecom man]

have you back-tested this idea?

I haven't been able to find a back tester that has the quantifiers that I use for this trading strategy.

 

[townhaus]

Everyday i check the stock lists for the one that has dropped the most for the day. I look for a stock that has dropped around 50% that day but for all the right reasons.(bad earnings came out etc.) The stock had to have a volume higher than 1 mil on that day. I don't buy drug companies at all. I put a trailing stop loss on the stock as soon as I buy of 5-10%. I don't buy stocks that are currently trading below $5 a share.

Your approach is very objective, thats good.

I haven't been able to find a back tester that has the quantifiers that I use for this trading strategy.

Worden Telechart/TC2000 would work for this sort of strategy and system. They offer a free trial if i recall right.

See:
http://stockbee.blogspot.co.uk/2010/05/how-to-find-shorts-using-telechart.html

Amibroker is my favourite tool, and is great for backtesting trading sytsems.

 

[jpmartin]

I was just curious if anyone else has used this sort of stock investment strategy and if you had any tips, tricks, or horror stories.

Imho, I don't think it's worth the time - you become like a day trader, with very little assurance that the dead cat will bounce. If you're into shorting stocks instead, that's a different ball game - there's only a limit how much a stock can fall - i.e. to zero. Check out Timothy Sykes, and try to dead cat bounce the stocks he shorts - and you'll later on realize what I'm talking about.

 

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[townhaus]

there's only a limit how much a stock can fall - i.e. to zero. Check out Timothy Sykes, and try to dead cat bounce the stocks he shorts - and you'll later on realize what I'm talking about.

You can learn more about marketing than you can about trading from this guy.

 

[Ecom man]

Imho, I don't think it's worth the time - you become like a day trader, with very little assurance that the dead cat will bounce. If you're into shorting stocks instead, that's a different ball game - there's only a limit how much a stock can fall - i.e. to zero. Check out Timothy Sykes, and try to dead cat bounce the stocks he shorts - and you'll later on realize what I'm talking about.

I check the market once a day around 2:30 central time and see if there are any stocks that look interesting. If I buy one I set trailing stop loss and then check it premarket to see if profit is good enough to sell. One way or another i always sell it the next day even if profit is minimal. I rarely hold the stock longer than a day. (I did hold for 4 days a couple weeks ago on netflix stock after it dropped. I sold it with about a 5% gain.)

 

[jpmartin]

You can learn more about marketing than you can about trading from this guy.

Can't disagree with that. Have you seen his dvd - he does know what he's doing. The question is whether he has built a large enough follower base that he can profit from his trade alerts.

 

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[GlobalWealth]

Everyday i check the stock lists for the one that has dropped the most for the day. I look for a stock that has dropped around 50% that day but for all the right reasons.(bad earnings came out etc.) The stock had to have a volume higher than 1 mil on that day. I don't buy drug companies at all. I put a trailing stop loss on the stock as soon as I buy of 5-10%. I don't buy stocks that are currently trading below $5 a share.

Great. While I obviously have not tested this, it does sound like you have a solid system to limit your losses and take advantage of gains.

Most people only focus on the gain and forget to limit the losses. This is critically important to focus on minimizing losses.

 

[themaxx]

Your approach is very objective, thats good.


Worden Telechart/TC2000 would work for this sort of strategy and system. They offer a free trial if i recall right.

See:
http://stockbee.blogspot.co.uk/2010/05/how-to-find-shorts-using-telechart.html

Amibroker is my favourite tool, and is great for backtesting trading sytsems.

http://stockbee.blogspot.co.uk/ is a very good recommendation - his strategy is similar (but broader) to what you're describing.

 

[townhaus]

http://stockbee.blogspot.co.uk/ is a very good recommendation - his strategy is similar (but broader) to what you're describing.

Stockbee really is one of the best gems i've come across and been very influential to me, and my trading style (and i dont even trade stocks).

 

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[themaxx]

Stockbee really is one of the best gems i've come across and been very influential to me, and my trading style (and i dont even trade stocks).

I've been following him for a while - he's amazing. How do you apply it to other markets? Momentum bursts on commodities???

 

[Ecom man]

Awesome! Thanks for the site. I will definately check it out.

 

[townhaus]

I've been following him for a while - he's amazing. How do you apply it to other markets? Momentum bursts on commodities???

I trade bitcoin , but was using the same approach on commodities before it existed and the same rules apply. I stick to long term trend following/breakouts style trading.

I also set up google alerts with 'all time highs', incase it brings something to me that i might otherwise miss.

Imagine a stock goes from $1, to $100. It has to reach multiple all time highs along the way. Getting in at a breakout of $10 could be a nice trade for example, while others might be looking to short then.

I rely on basic technical's - long term relative strength (in relation to other assets), momentum, and short term breakout/downs for entries and exits. Not just breakout of all time highs, though this will surely alert me to an entry if i wasnt in a position already.

My aim was always to be 90-100% quantitative, but find that discrection plays a lot of roles where i cant help it. e.g what exchange to trade on, should litecoin be part of my portfolio. Withdrawls in/out depending on how much cash i have/need. That cant be quantified.

I use fundamentals to decide whether theres a catalyst/reason for growth, only once. Then let price prove me right/wrong.

The fundamentals tend to stay constant for years and drive the long term relative strength i.e news is never a reason to enter or exit a trade though ill follow along to get a feel for how things are going.

I was trading CFDs. I discovered bitcoin, thought it was going to be huge and added it to the portfolio (fundamentals), but instead of buy&holding, developed a simple system for it that was pretty much the same as the others, just tweaked because of its higher volatility. (technicals)

I follow simple E.O.D technical rules for entries and exits

I backtest and decide what system/parameters to use (something that is reasonable realiable for that market's behaviour, cant optimize). Then stick to that system and follow the signals that occur.

My trades are 100% formula based i.e i can run a backtest next year and the results will match with the trades i will have placed.

Ill use some discretion in portfolio construction/weighting/allocations, but not the signals.

Also simple in/out. No pyramiding into or out of positions and i stay away from shorting/margin trading with bitcoin (or if i traded stocks), but would used leverage & shorts if i was trading a large commodities portfolio.

Umtimately everything boils down to individual risk tolerance and goals, but the patterns shown by stockbee form a good basis for many systems that can work, but you cant just follow the chart patterns that appear recognizable to the eye without knowing what to expect. You need to quantify the pattern, do lots of backtests and simulations to learn how your systems and markets behave, and then have a systematic way to buy/sell that you stick to IMO.

 

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[Ecom man]

Today there is a perfect example of a stock I am looking to trade. The only thing is this hasn't dropped enough so I won't be buying it. CSTM earnings were 1 cent below expectations and dropped 20%. Volume for the day is 4 mil as of right now. It hit its 52 week low today. It is a billion+ valuation company. The stock is trading at a good price range (not a penny stock) If it was down 40% I would buy it.

 

[biophase]

Buying stocks outright.

If this method of technical analysis is really reliable, you may want to look at options instead of buy the stock outright to propel your return. However, there is alot of risk involved in options if you don't understand them. When do you sell after you've bought?

 

[Ecom man]

If this method of technical analysis is really reliable, you may want to look at options instead of buy the stock outright to propel your return. However, there is alot of risk involved in options if you don't understand them. When do you sell after you've bought?

I normally sell one day after buying the stock. I did try options instead of the stocks for a bit but it seemed like many of the stocks did not have options with them or the options prices would change a lot with only a small movement of the stock.

 

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[Guest3722A]

Today there is a perfect example of a stock I am looking to trade. The only thing is this hasn't dropped enough so I won't be buying it. CSTM earnings were 1 cent below expectations and dropped 20%. Volume for the day is 4 mil as of right now. It hit its 52 week low today. It is a billion+ valuation company. The stock is trading at a good price range (not a penny stock) If it was down 40% I would buy it.

I say buy it the following day after you get a green candlestick that forms completely on the right of the lower 20 sma bollinger band. Set a reasonable stoploss preferably below the band and move it up using a variety of intraday timeframes. Set 1, 2, or 3 targets based on places you feel comfortable with and let it ride. Every time a target gets hit, move your stop up slightly to retain as much as you can if it goes against you. The closer you get your initial stoploss to a 1:1 risk reward the better - but it doesn't always happen that way!

disclaimer: if you lose your a$$, it's on you!

 

[incredibl]

Try something like stratos market analyst to get some directions on trend. I agree, finding losers, but then you need to be sure on why they've dropped off, it's not as simple as dead cat as sometimes it never materialises. Things can get worse very quickly and recovery could take ages. Trend is friend works better imo

 

[Guest3722A]

I say buy it the following day after you get a green candlestick that forms completely on the right of the lower 20 sma bollinger band. Set a reasonable stoploss preferably below the band and move it up using a variety of intraday timeframes. Set 1, 2, or 3 targets based on places you feel comfortable with and let it ride. Every time a target gets hit, move your stop up slightly to retain as much as you can if it goes against you. The closer you get your initial stoploss to a 1:1 risk reward the better - but it doesn't always happen that way!

disclaimer: if you lose your a$$, it's on you!

Another profitable call days before it happened. This one doji'd though for the signal which is why the profit was limited. Still profitable and from an EV standpoint, the call with this stock's profile at the time was the right one.

 

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