What Is A Falling Knife?
A falling knife is, as it implies, with the direct implication being a steep dip in the valuation of a stock, commodity, property, and so on, that could signal a downward trend soon.
The term “falling knife” in economics refers to a high-risk enterprise, and all indicators are that all momentum may be lost completely, and things may go as far as bankruptcy as a result. As such, it is essential to exercise caution before making such judgments. It could be channeled positively and made a profitable venture, especially if timed so well that the investor buys when the valuation of the investment opportunity is at the lowest it will ever be. In that case, as prices begin to improve, the investors start to reap the rewards of their investments right away. It can also be an avenue to ensure profits for investors to buy and hold or buy and sell off before the valuation drops further.
As there are no guarantees in making these choices, it is usually helpful to study trends using chart patterns and technical indicators to sniff the possibility of an upward trajectory before making investments.
In some cases, a rebound is referred to as ‘whipsaw’ in which the valuation rises again, or they might crash further. Still, it is generally a pointer to the low level of security that is guaranteed.
A falling knife might be a purchasing opportunity if the factors that lead to it are transient or do not change a buy and hold the investor’s justification for investing.
Bullish transactions are tough to time effectively for traders and those with a shorter horizon.
Falling Knife Example
Let’s say you’re on the stock market, and a specific stock has had an average movement or trend of $50 – $60 for the past two months.
The stock sinks below $20 in a matter of days the next month, and that means you suffer from a falling knife.« Back to Glossary Index