HomeTrading strategiesHow To Catch A Falling Knife (The Important Information)

How To Catch A Falling Knife (The Important Information)

This submit is written by Jet Toyco, a dealer and buying and selling coach.

Let me ask you…

Have you ever ever received “hyped” right into a buying and selling place after which gone all-in?

You get empty guarantees and hope like…

“This crypto goes to the moon, it is going to triple in value, assured!”

“I’ve an insider tip on this inventory, this may certainly quadruple in a couple of days!”

After which what occurs?

That’s proper…

It usually all the time goes the other approach.

falling knife

falling knife

It’s just like the market is aware of once you purchase and it all the time crashes once you do!

Then, you began pointing fingers…

“What on this planet is Elon Musk doing?”

“It’s all of the President’s fault!”

“I shouldn’t have listened to these silly merchants”


What if I informed you that there’s a way find out how to see by means of all of these BS?

What if I informed you that there’s a approach to revenue from sharp market crashes freed from different folks’s opinions?

That, my buddy…

That is what you’re going to be taught in right now’s buying and selling information, which is to determine and commerce Falling Knives.

falling knife

falling knife

falling knife

Sounds good?

So, right here’s what you possibly can count on in right now’s coaching…

  • A short introduction to what a falling knife is
  • How you can persistently spot and determine a falling knife so that you just’ll by no means second-guess your self
  • An entire falling knife buying and selling technique (and a few additional tips about find out how to scale back threat and enhance reward)

Are you able to go?

Then let’s get began…

What’s a falling knife, and the way does it work?

Positive, I gave you some first rate examples of falling knives some time in the past.


These charts are cherry-picked (I need to admit).

It signifies that in the actual world of buying and selling, falling knives don’t look the identical.

That’s why we should return to the fundamentals my younger padawan!


A falling knife is solely when a market experiences a pointy decline.

You may be questioning…

Why is it referred to as a “knife?”

falling knife


It’s referred to as a knife as a result of it might slice by means of your account steadiness simply as simply as a bodily knife would!

So, when you spot market declines like these…

falling knife

These aren’t falling knives!

These are mini punches, ones which you could deal with!

So, let me offer you an instance of a Falling Knife sufficiently big to pierce your buying and selling account in half…

On final April 2022, Netflix printed an earnings report.

Nevertheless, the report confirmed that Netflix received fewer subscribers and is anticipated to say no additional.

Are you able to guess what occurred subsequent?

falling knife

Growth, a 37% decline!

A Falling Knife that pierced by means of buyers’ and merchants’ hearts alike!

In the event you tried to purchase after a pointy decline like that, or, ought to we are saying, a Falling Knife…

falling knife

I wouldn’t be stunned when you second-guessed and requested your self…

“Oh shoot, Netflix dropped much more, have I made the appropriate alternative?”

“Is it not the underside but?”

Your confidence can be shaken, and rightly so!

Positive, the worth ultimately rebounded based mostly on this instance…

falling knife

However keep in mind that this too was a falling knife…

falling knife

Till in fact, it prolonged and have become a Falling Katana (hah).

On this case, what would you do?





Don’t fear…

I’ve ready a bit for you in a while that precisely solutions these questions.

However do know that every one Falling Knife eventualities are not the identical in addition to the way it can have an effect on you psychologically.

And by the way in which…

Falling Knives can occur with or with none elementary information (it’s true).


Since I shared with you the “psychological” facet of buying and selling with Falling Knives and likewise now that you realize what it appears like…

You may be questioning:

“How EXACTLY do I do know if it’s a Falling Knife or not?”

“Is there a sure proportion?”

“Which indicator do I would like to make use of to know if it’s a Falling Knife?”

Let me let you know…

These are some excellent questions!

However relaxation assured that I’ll reply them within the part.


Then maintain studying…

An in-depth information on find out how to determine a Falling Knife

Right here’s the reality:

Buying and selling falling knives are dangerous.

It doesn’t matter how good you’re as a dealer or how good your intestine really feel is.

It’s dangerous!

That is why it’s necessary to know what precisely is and isn’t a Falling Knife!

So, let me let you know this primary…

There can by no means be a single metric or indicator to outline a Falling Knife

Check out this:

falling knife

The “sharpness” of this Falling Knife got here down to twenty% earlier than rebounding!

However, examine this out:

falling knife

Similar market.

Similar Falling Knife instance.

However totally different type!

This inventory crashed all the way down to -90% earlier than rebounding.

The identical precept applies in Foreign exchange, Commodities, Bonds, and particularly…

The crypto markets!

falling knife

A 43% decline earlier than rebounding!


I’m positive crypto hodlers are fairly used to it by now, how -50% to -99% declines are fairly regular, however you get my level.

So why am I telling you this?

Right here’s why:

As a result of there isn’t a particular metric or technical indicator that may outline a Falling Knife.

Positive, indicators such because the Common True Vary (ATR) can assist out, however as a substitute…

Listed here are the 2 issues that you must deal with.


A big-bodied candlestick

There are solely three sorts of candlesticks on the market.

falling knife

Small wick with an extended physique.

Small wick with a small physique.

Lengthy wick with a small physique.

So, which candlestick must you spot when in search of Falling Knives?

That’s proper, a LARGE-bodied candlestick!

falling knife

That is precisely what defines a Falling Knife!

However we’re not executed but.

As a result of the second factor that you must search for in defining a Falling Knife is…

A big-bodied candlestick relative to different candlesticks

Let me clarify.

Do you see these candles right here?

falling knife

It just about appears like a traditional day, candlesticks dwelling in peace.

After which this occurs…

falling knife

Growth shakalaka!

It’s just like the final candlestick simply slaughtered each earlier candlestick!

So, with out second-guessing or squinting your eyes, I’m positive you possibly can agree with me that this can be a Falling Knife, proper?


So only a fast recap, it’s a Falling Knife when these two issues occur…

When the market makes a number of big-ass bearish candlesticks.

falling knife

And when it’s clear as day that it’s larger and meaner than the remaining.

falling knife

Easy, proper?


Now that you realize what it’s and find out how to determine it Falling Knives…

You’re now able to dive in to know find out how to commerce the Falling Knife.

Ensure that to take notes as we gained’t simply deal with entries and exits…

But in addition threat administration methods on find out how to scale back your threat and enhance your rewards when buying and selling Falling Knives.


You rattling ought to be!

So, maintain studying, and let’s go!

A step-by-step information on find out how to commerce a Falling Knife efficiently

You’re in all probability going to get offended at me for saying this however right here’s the factor:

We don’t precisely “catch” and enter because the knife is falling.

In the event you can’t do this in actual life, what extra in buying and selling?

As a substitute, what can we do?

We enter after affirmation.

That’s proper, we need to know “how lengthy” the knife is.

As a result of then we’ll know the bottom it might stab the markets!

Don’t fear my buddy, I’ll clarify.

Step 1: Affirmation

In fact, recognizing a falling knife based mostly on what I’ve shared with you earlier than is the very first thing.

So, once you see this, do you purchase it?

falling knife

When this market is already on the information, do you purchase?

falling knife


When your family and friends are hyping up this market promising you x10000 returns, do you purchase?

falling knife

No, my buddy…

You look forward to affirmation.

You narrow your self out of the “noise” and observe your plan.

So, what occurs now once you see this?

falling knife


You’ve waited for therefore lengthy, a inexperienced candle!

However do you purchase it?

Not but!

As a result of to verify this Falling Knife setup, we should dig deeper down into the decrease timeframe…

Step 2: Transition commerce setup

That’s proper, when you see the primary inexperienced candle after a pointy decline, you go all the way down to the decrease timeframe.

On this case, I confirmed you an instance of ETHUSD on the 8-hour timeframe, so we’re digging down into the 1-hour timeframe.

So, now that you just’re within the decrease timeframe, what are you in search of?

falling knife

A get away of a bullish flag sample.

In case you’re questioning, right here’s what it appears like:

falling knife

And the place it’s on the chart:

falling knife

Alright now, that is necessary…

As soon as there may be:

  • A legitimate Falling Knife on the upper timeframe (On this instance, I used the each day timeframe)
  • A primary inexperienced candle from that Falling Knife
  • A bullish flag sample on the decrease timeframe (On this instance, I take advantage of the 4-hour timeframe)

You could have one final affirmation earlier than you hit the purchase button.

Are you able to guess what it’s?

It’s easy, a candle shut!

falling knife

A candle shut is a single occasion that confirms the whole lot we noticed.

Not an assumption, a affirmation!

As soon as that occurs you need to enter on the subsequent candle open, with cease loss under the flag sample:

falling knife

Is smart?

Now, what’s subsequent?


This one’s a bit difficult.

Nevertheless, this system can probably scale back your threat whereas rising your rewards.

Step 3: Danger Administration

Irrespective of how good you’re as a dealer or how good your intestine really feel is, buying and selling Falling Knives is dangerous.

Keep in mind that line from some time in the past?

Good, as a result of that is still true.

Since we will’t change the truth that buying and selling Falling Knives is dangerous, what can we alter?

Our threat administration.

What do I imply?

Earlier than you enter Falling Knife setups we mentioned resembling these:


falling knife

You need to be sure to threat half than ordinary.

So when you enter trades with a 1% threat per commerce, it’s essential that you just first enter with a 0.5% threat per commerce.

falling knife

That means, when the worth hits your cease loss, you gained’t lose greater than 0.5% of your account.

Sure, the rewards are nearly non-existent however you first need the market to verify your commerce earlier than you totally commit!

And what if it does?

falling knife

You scale into the commerce, after which transfer your stops to breakeven!

falling knife

Intelligent, am I proper?

And thoughts you, this idea doesn’t simply apply to Etherum, it applies to different markets on the market!

So, bear in mind…

Danger small, after which decide to the commerce by scaling in because it makes one other bull flag breakout.

And eventually…

Step 4: Commerce Administration

This step is a very powerful step of all.


Effectively, how else are you going to make a revenue?

So, similar to the remaining.

There have to be a rule in place on how you must handle and exit your trades.

And the simplest approach to do it?

Is to set your take revenue space earlier than the Falling Knife occurred.

On the “deal with” of the knife.

falling knife

Since a Falling Knife crashes, there’s barely any room for potential sellers to get in because the “roof” is simply too excessive!

Now, discover that we’re defining your take revenue on the greater timeframe which is the 8-hour timeframe on this instance.

That’s proper!

As you time your entries on the decrease timeframe, on this case, we handle our commerce on the upper timeframe.

That is referred to as transition buying and selling, and it’s the identical methodology is that provides us such a MONSTER risk-to-reward ratio!

falling knife

So now you may be questioning:

“Hmm sounds cool, however what if the worth simply smells the take revenue space after which reverses?”

“What do I do if the worth by no means reaches the take revenue space after which goes again once more to my cease loss?”

If that’s you then boy you positive are fairly uncommon!

Most merchants don’t even query when they need to exit their trades.


“Ah I’ll simply maintain this for 10 years and go away or not it’s”

“I’ll know, I’ll let my intestine really feel resolve when to exit”

However in fact, that’s not you!

So, what do you do in case the worth doesn’t attain your take revenue space?

We use a short-term trailing cease loss.

That’s proper, two issues!

A brief-term…

Trailing cease loss…

There may be a few standard trailing cease loss on the market resembling:

And doubtless extra.

So, what you do is choose one which is sensible to you probably the most, and select a “tight” interval to path your cease loss within the greater timeframe!

For instance, we’ll use a shifting common to path our cease loss.

Because of this we gained’t exit our commerce except it hits our take revenue, or hits and closes under the shifting common!

Once more!


Trailing cease loss…

So, on this case, we are going to use a good shifting common interval of 8.

Positive, you should utilize 10 MA, 6 MA, and seven MA, it doesn’t matter.

What issues is that you’re utilizing a short-term trailing cease loss!

So on this instance, we will see how the worth didn’t attain the take revenue degree and hit our trailing cease loss.

falling knife

Positive, it didn’t hit the “jackpot” take revenue space you plotted, however nonetheless, you possibly can safe some earnings.

Sounds good!

Now, if you wish to be taught extra about trailing cease loss (which once more, you possibly can apply utilizing the idea I taught you), you possibly can examine this out:

How you can Use Trailing Cease Loss (5 Highly effective Strategies That Work)

So earlier than I finish, let me give a short disclaimer for you.

That is necessary.


I do know I sound like a damaged file.

However buying and selling a Falling Knife is dangerous.

So, as a lot as potential…

I need you to check this in your finish and see with your personal eyes how the sting of this setup unfolds.

Lastly, Falling Knives do occur in each market and timeframe, however It’s essential that you just:

  • Select a timeframe which you could persistently decide to (don’t leap round timeframes)
  • Know that Falling Knives don’t look all the identical, and may look totally different from the instance I confirmed you simply now

With that mentioned…

Let’s do a fast recap of what you’ve discovered right now!

Backside Line

  • A Falling Knife occurs when the worth makes a pointy decline in a brief period of time
  • Falling Knives don’t look the identical, however one goal approach to outline it persistently is to be sure that the large-bodied candles are larger than the remaining
  • When buying and selling Falling Knives, you have to look forward to a inexperienced candle to type, and search for a bullish flag sample on the decrease timeframe which then you should utilize a set or trailing cease loss to seize a revenue.

There you go!

I hope you discovered this text informative and loved studying it. 

So now over to you…

Would you commerce the Falling Knife technique?

Additionally, have you learnt somebody who misplaced some huge cash from Falling Knives?

Let me know within the feedback under!

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