What is a falling knife?

A falling knife is a scenario led by a rapid drop in the prices of a cryptocurrency or even a stock. The name comes from the fact that the drop intensity resembles that of a falling knife, which shouldn’t be caught, as you then risk spilling blood. Consequently, a falling knife is a warning sign when the price drops and continues to move downward, with or without rebounds.

Should you try to catch a falling knife?

The rule of thumb is not to catch a falling knife. The reasons for not catching or trading it include a high level of risk, not enough rewards, and even higher stress levels. However, if you still want to trade, it is better to go for a short position instead of a long or buyer-specific trading position.

What is the opposite of a falling knife?

An uptrend is the only plausible opposite of a falling knife. However, if you are looking short-term, a dead cat bounce can be a worthy opponent as it involves a quick and sharp recovery in the prices of an asset. Yet, it is very difficult to predict the level from where dead cat bounce will happen.

Should you buy a stock after it plummets?

In case crypto or even a stock plummets, you should wait for it to hit bottom. You can use indicators like RSI and Bollinger Bands to try and identify the bottom. Once the bottom is in, you need to look at the fundamentals, wait for an upmove and a retracement, and then you can consider entering the same. Yet, this isn’t a hard and fast rule. Some traders prefer dollar cost averaging during drops. What you do depends on your risk appetite and financial goals.