DEFINITION of 'Cover On A Bounce'

The covering of a short position after it has reached and bounced off a level of support. This strategy waits for the price to move to a support level, instead of selling before, to see if the level will hold - because the trader will benefit if it doesn't hold. Once the security bounces, it is clear the security will have trouble moving down further, so the trade covers the short position.

BREAKING DOWN 'Cover On A Bounce'

Levels of support act as a backstop to a further move downward in price, but can sometimes fail to hold. If a security falls below a support level, it will often lead to an even stronger downward move as the level is taken out. The trader waiting for a bounce is betting that the support level will not hold and they will benefit if this materializes.

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RELATED FAQS
  1. How do traders implement the Buy a Bounce Strategy?

    Learn how traders execute the buy a bounce strategy for a security that has reached an important support level. Find out ... Read Answer >>
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    Buy stocks on a temporary pullback in price to acquire them at a price level that should be profitable when the stock resumes ... Read Answer >>
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