what a falling knife tells you
the term falling knife suggests that buying into a market with a lot of downward momentum can be dangerous just like trying to catch an actual falling knife in practice however there are many profit points with a falling knife a trader who buys at the bottom of a downtrend can realize a significant profit as the price recovers if it s timed perfectly likewise it can be profitable to pile into a short position as the price falls and get out before a rebound even buy and hold investors can use a falling knife as a buying opportunity if they have a fundamental case for owning the stock but many traders still pay lip service to the falling knife adage because there s a very real risk that the timing will be off and there could be significant losses before any gains are realized traders should look for confirmation of a trend reversal using other technical indicators and chart patterns instead of trying to catch the falling knife an example of confirmation could be as simple as waiting for several days of upward momentum after the fall or looking at the relative strength index rsi for signs of a stronger uptrend before buying into the new trend 