How do you catch falling knives?
- Thread starter Port1385
- Start date
Catching falling knives can be tricky, but in forex it is very profitable strategy if you enter at very strong support level where you usually get at least a small bounce to move your stop to BE and take part off and leave the rest on for a risk free trade. Also in FX you donât have to be concerned with liquidity and overnight gaps.
With stocks, Iâd recommend that you trade only very liquid stocks where the institution get involved at certain levels of confluence. If you want to take "V reversal" , it is better to put on option spread to take advantage of high IV and to have more flexibility when things donât go the way you expected, and obviously to have predefined risk.
If you are not familiar with how spreads behave, or you want to use stocks only, then Iâd recommend you wait for first pullback on a way up and also Iâd recommend that you watch for increased volume as a confirmation for buying pressure at the reversal level, and for lower volume on the first pullback (big institutions cannot hide, thatâs why I recommend reversal from extended levels only on very liquid stocks where institutions are involved). Though still I personally would stick with options to have predefined risk, because one day you can wake up there can be huge gap against you.
Depending on what analysis you use, it is always good idea to trade only at levels that are watched by institutions, and not just take extended reversal in a "no manâs land". Reversals from extended zones if taken at levels of high confluence with volume confirmation are one of the most profitable trades because the R/R is outstanding and beats the hell out of momentum trading. However you must be very good at reading price action and not rely on indicators.
Unfortunately most traders donât know how to trade reversals from extended levels, plus they donât have the balls to go against the crowd so donât expect to find too many posts here on how to do it, instead expect people posting that it doesnât work.
Good luck
Quote from Mr.Consistent:
Catching falling knives can be tricky, but in forex it is very profitable strategy if you enter at very strong support level where you usually get at least a small bounce to move your stop to BE and take part off and leave the rest on for a risk free trade. Also in FX you donât have to be concerned with liquidity and overnight gaps.
With stocks, Iâd recommend that you trade only very liquid stocks where the institution get involved at certain levels of confluence. If you want to take "V reversal" , it is better to put on option spread to take advantage of high IV and to have more flexibility when things donât go the way you expected, and obviously to have predefined risk.
If you are not familiar with how spreads behave, or you want to use stocks only, then Iâd recommend you wait for first pullback on a way up and also Iâd recommend that you watch for increased volume as a confirmation for buying pressure at the reversal level, and for lower volume on the first pullback (big institutions cannot hide, thatâs why I recommend reversal from extended levels only on very liquid stocks where institutions are involved). Though still I personally would stick with options to have predefined risk, because one day you can wake up there can be huge gap against you.
Depending on what analysis you use, it is always good idea to trade only at levels that are watched by institutions, and not just take extended reversal in a "no manâs land". Reversals from extended zones if taken at levels of high confluence with volume confirmation are one of the most profitable trades because the R/R is outstanding and beats the hell out of momentum trading. However you must be very good at reading price action and not rely on indicators.
Unfortunately most traders donât know how to trade reversals from extended levels, plus they donât have the balls to go against the crowd so donât expect to find too many posts here on how to do it, instead expect people posting that it doesnât work.
Good luck
One may have as many balls as he wishes but standing in the way of a freight train is not prudent and prudence is a prerequisite if getting chopped up is to be avoided. As they say, there are many bold traders and there are many old traders but there are no bold and old traders.
I agree with you, that's why these trades have to be taken at a zone of strong confluence and with price action and volume confirmation.
I don't consider entering on pull-backs with the trend to be "reversal trading"... in my opinion, that's "trend-trading" or trading "with momentum".
Here's the ES and my example of:
Trend trading- http://www.screencast.com/t/Sgg1a0xi4
Reversal trading- http://www.screencast.com/t/PjmWNbxMW
I did lots of kinfe catching before, most are very profitable. i remeber one day last year 2008 CAL dropped from 18 to 13 becuase of an old report around noon, i bought it in the drop at 14, and in half to one hour, it exactly came back to 18, I made 5k in half hour.
another knife catching is dndn, it suddenly dropped from 20+ around noon to 7 and 8 range, I bought it without any thinking, then it was suspened trading, this made me pretty nervous, then boom, at after hours, it shot to 23+, gee, instantly almost 15k+profit.
my worst hit in catching knife is catching BSC falling knife, in the big drop, I strated to buy from 36, it dropped to 29 in matter of second, becuase I did not realzie i alreday withdrewed some fund from my account, I get hit margin call, and lost almost 70% of my account value. taht is teh wosrt hit. from then, I was afraid of executing bottom picking. now i prefer to buy in the thrust.
if you do it professionally, like have a stop loss there, it should be ok.
another knife catching is dndn, it suddenly dropped from 20+ around noon to 7 and 8 range, I bought it without any thinking, then it was suspened trading, this made me pretty nervous, then boom, at after hours, it shot to 23+, gee, instantly almost 15k+profit.
my worst hit in catching knife is catching BSC falling knife, in the big drop, I strated to buy from 36, it dropped to 29 in matter of second, becuase I did not realzie i alreday withdrewed some fund from my account, I get hit margin call, and lost almost 70% of my account value. taht is teh wosrt hit. from then, I was afraid of executing bottom picking. now i prefer to buy in the thrust.
if you do it professionally, like have a stop loss there, it should be ok.