“Cover on a bounce” is a trading strategy typically used by traders who have a short position on a security, including a currency pair.
This strategy involves waiting for the security’s price to “bounce” or increase slightly after a substantial decline before covering, or closing out, the short position.
The idea behind this strategy is to maximize profits from the short sale.
Here’s how it works:
When a trader shorts a security, they’re betting that the price will decline.
If the price does decline substantially, the trader stands to make a significant profit. But markets often don’t move in straight lines — a substantial decline might be followed by a small uptick or “bounce” before the price continues to fall.
If a trader covers their short position just as the price begins to bounce, they may miss out on additional profits if the price continues to fall after the bounce. However, if they wait to cover until after the bounce, they can sell at a higher price, potentially increasing their profits.
However, like all trading strategies, “cover on a bounce” is not without risk. There’s a chance that the price might not continue to fall after the bounce.
In fact, the price might continue to rise, potentially leading to losses on the short position. Therefore, it’s essential to use this strategy judiciously and in conjunction with other risk management techniques.