Cover On A Bounce
Tue, Apr 15“Cover on a bounce” is a trading strategy commonly employed by traders holding a short position on a security, such as a currency pair. This approach entails waiting for the price of the security to “bounce” or experience a slight increase after a significant decline before closing out the short position.
The rationale behind this strategy is to optimize profits from the short sale. Here’s how it functions:
When a trader shorts a security, they are speculating that the price will decrease. If the price does drop significantly, the trader stands to gain a considerable profit. However, markets rarely move in a linear fashion — a notable decline may be followed by a minor uptick or “bounce” before the price resumes its downward trend.
If a trader decides to cover their short position right as the price starts to bounce, they risk missing out on further profits if the price continues to decline after the bounce. Conversely, if they wait to cover until after the bounce, they can sell at a higher price, potentially enhancing their profits.
Nevertheless, like all trading strategies, “cover on a bounce” carries its own risks. There is a possibility that the price may not continue to fall after the bounce. In fact, the price could keep rising, which may result in losses on the short position. Therefore, it is crucial to apply this strategy carefully and in combination with other risk management techniques.
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