how to use a falling knife
there are several ways to profit from a falling knife many of the trading approaches are time sensitive and require more tools than simply identifying a stock that s seeing a sharp drop a fundamental case for catching a falling knife can be made depending on the reason for the drop there are many potential causes for a falling knife to occur including a falling knife could be a buying opportunity if the circumstances that led to it are temporary or if they don t alter a buy and hold investor s case for investing it s difficult for traders and those with a shorter timeframe to time bullish trades correctly example of a falling knifethe following chart shows an example of a falling knife and demonstrates the danger of trying to predict a bottom the stock became a falling knife after moving off of its 50 day moving average traders trying to catch the falling knife may have bought in at around 8 50 when there was a brief reprieve from the selling pressure but they would have lost money as the stock moved to a low of around 6 00 before finally bottoming out traders who waited for confirmation could have benefited from the move from 6 00 to 10 00 in the ensuing month falling knife vs a spikea falling knife is a sharp drop a similar type of trading slang is a spike which refers to a sharp movement in price action either up or down but a spike is most often associated with an upward movement in practice limitations of a falling knifethere are many cases in which a sharp fall can provide an opportunity many of these require some form of confirmation such as a moving average convergence divergence macd indicator showing positive divergence a falling knife is an ill defined chart formation at best it s not the most significant part of a trade playing off a breach of support or a true reversal 