A falling knife is a term for an asset’s rapid drop in value. Catching a falling knife is a dangerous trading method in which a trader attempts to buy close to the bottom of such a drop.
What is a Falling Knife?
Catching a “Falling Knife” means buying into an asset that has extreme downward momentum and has not given any bullish reversal signs.
In simple terms, the benefits of the tactic are that if timed perfectly, a trader can buy the exact bottom and book considerable profit once the price of the asset recovers.
However, the drawback is that the price may continue falling to no avail. The use of leverage exacerbates this drawback. This is because the continuation of the decrease can quickly cause liquidations.
Why Should You Avoid Falling Knives?
The main reason to avoid a falling knife is that there is nowhere to place a stop loss. Therefore, the losses could be unlimited. This can be illustrated by the Bitcoin…
