A falling knife refers to the price dive of an asset and denotes a downward momentum of the financial market.
What Is a Falling Knife?
When the price of an asset decreases rapidly, it is referred to as a falling knife. When it happens, experienced traders hold off on purchasing back into the asset until it reaches its lowest point. This is because many assets rebound swiftly after the falling knife reaches its bottom, also known as a whipsaw.
For a variety of reasons, a stock’s downward price behavior qualifies it as a falling knife. Negative news regarding an issuing business may often result in an asset’s falling knife pattern, which is followed by broad market divestment. In these situations, the stock’s price frequently recovers in the market when the issuer makes a good follow-up statement.
If timed correctly, a falling knife can produce huge profits for many investors. If investors do not buy the stock according to the trend, they risk losing money if the price keeps falling, until a whipsaw happens, causing prices to rise beyond the investors’ initial position.
New investors, according to experts, are more inclined to try to grab a falling knife since it enables them to acquire it at a cheap price. Investors who pursue a long-term strategy, on the other hand, may be put off by it since they believe a falling stock will eventually recover. In the long term, catching a falling knife can pay off, but it’s a calculated gamble. A proportion of your investment portfolio can be utilized for this sort of investment if you have a huge portfolio, but having a substantial percentage invested in these types of assets is extremely hazardous.
The secret to catching a falling knife is to expect to make a mistake. Rather than reinforcing your error by purchasing more, it is critical to limit your exposure and reclaim your emotional equilibrium. To begin, you must have a strong belief in your purchasing analysis, since if you are incorrect in this area, it will not matter how wonderful your timing is. Nevertheless, even if you are correct and confident, poor timing may be catastrophic for your portfolio.