The phrase “falling knife“, also known as “catching a falling knife”, refers to the action of buying an asset that is rapidly declining in price.
While a falling knife refers to a sharp drop, there is no specific magnitude or length of the drop to label a price move as a “falling knife”.
The phrase is generally used as a caution not to jump into buying an asset while its price continues to plummet.
For example, the phrase “Don’t try to catch a falling knife” means, “Wait for the price to bottom out before buying it.” If timed perfectly though, you can successfully “catch the falling knife”!
This means that you were able to buy the asset right at the bottom or very close to the bottom! Cha-ching!
Just know that trying to catch a falling knife is a very dangerous activity, just like trying to catch an actual falling knife! While it’s possible to catch an actual falling knife, you have to be pretty crazy to try.
In reality, most knife-catching attempts by traders fail and often result in huge losses.
Instead of trying to “catch the falling knife,” traders should look for confirmation of a trend reversal using technical indicators and chart patterns.
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