Occurs when a trader covers a short position after it has reached and “bounced” off a support level.
What is Cover On A Bounce?
Cover on a bounce is a stock trading term that covers a position by trading after the stock price has bounced off a support level. The strategy involves waiting for the stock to go low enough to hit a support level, glance briefly, go slightly lower to correct for the bounce, and close the short position at this low point.
The trader or investor uses the bounce to indicate that the price will go slightly lower to correct the bounce but not significantly lower. The danger of using this strategy is that it is possible that moves upward after hitting the lower support level could be a complete reversal, not simply a predictable bounce.
How Cover On A Bounce Works
Cover on a bounce means to close a short position by buying a stock after the price falls enough to hit a level of support, then bounce up briefly, and then correct. This trading strategy uses the bounce to indicate that the stock has stopped falling, allowing the investor or trader to close their short position at the lowest, or close to the lowest, the price they can.
A level of support is the lowest price a stock has traditionally hit, which means the store is unlikely to go below that price. A trader or investor could wait until the price falls to that support level and buy to close the short position. However, if the support level fails to hold and the price goes even lower, that can cause momentum, and the price will drop much more significantly, and the trader or investor should wait to close the position.
There is no way to know if the support level will hold until it either does or doesn't. This means that a bounce up off the support level is the sign that the level of support will have, so the bounce is the best indicator to the investor or trader that this is the lowest price they will get. As soon as the price corrects from the bounce, the trader or investor will close the position.