A market’s price action is referred to as a ‘falling knife’ on a chart because of its speed and trajectory. It continues to make lower lows without stopping or bouncing back. Before there is a signal or a good reason to do so, it is not a good idea to buy into a chart with plunging price action that can’t find support.
Price Action As A Falling Knife
- Just because something is falling fast doesn’t mean it can’t go any lower. It isn’t a good time to buy. Low prices can fall much further before gaining traction with new buyers at key price points.
- A price that is rapidly falling is not an opportunity for a quantified signal to buy the dip.
- When a chart stops going lower, finds support, and then starts going up, the chances of buying the dip are better. Waiting for a reversal may result in a slightly higher entry price but a higher chance of reversal success.
- Stocks fall for a reason. No one wants to buy it at current prices. So buy them at a price level where buyers are looking.
- When a downtrend is in motion, it tends to continue lower because it is the path of least resistance.
- The difference between buying the dip and catching a falling knife is significant. One can provide you with a good risk/reward ratio entry. While the other can rip your account to shreds as it continues to fall.
- Some graphs reach zero or never return to a higher level. Companies go out of business, penny stocks can be a rip-off, crypto currencies can be worthless, and option contracts can expire worthless. Even oil futures contracts have the potential to go negative. Buying things with built-in value that have some intrinsic value can buy your chances of success.
- The difference between buying the dip and catching a falling knife is significant. One can provide you with a good risk/reward ratio entry, while the other can rip your account to shreds as it continues to fall.
- Instead of attempting to catch a knife by its blade as it falls, wait for it to stick in the ground and then pick it up by its handle.
- Price action is important for both investors and traders.