Catching a Falling Knife
Trading Strategy

Catch Falling Knives Without Losing Fingers

What a funny phrase…”Catch a falling knife”
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​I guess it’s to remind you that if you do try… get it wrong, you can lose your fingers.
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But on the flip side… get it right and you can pull off a pretty neat trick!
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Ok so trading it…

Now, I’m in agreement that if the market is in a heavy downtrend, relentless selling. Whether that’s intraday or multi-day. Just stepping in front of it blindly, buying because it’s “too low” is suicide.
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​You might get away with it a few times, but trends almost always continue far more than we think.
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​However, is there a way we can catch a falling knife and then increase the probability of the handle being in our hand AND not chop off our fingers if we get it wrong?
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Let’s have a look.
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So how do trends typically end?
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Here are the main 3.
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​#1 V-shaped reversal – Market just runs back up as quickly as it ran down.


#2 Flush – The final bar has large volume and a large range.


#3 Test then retest – A recent low holds on the second visit.


I think that V-shaped reversals are arguably the toughest pattern.

You have to buy into strength after the turn and run the risk that the market could retest that low.

Or you wait for the first pullback/flag and play that as a setup within a setup.

Decent enough setups but sometimes the RvR gets a bit skewed.

The flush usually has that large range bar accompanied by high volume.

It’s the last of the sellers and if you like to catch knives it gives you a way to structure the stop nicely.

  • You see the flush
  • Wait for the pop
  • Get long, stop under the low

Your stop is in a sensible place and if you position size correctly you won’t get your fingers chopped off.

You just need to be patient for the flush.

What about the test and retest?

Patience again with this one.

But if you see the second test, then a supply-demand shift to the upside. That can be a very nice way of expressing the long idea quite early, but also having a decent stop-loss position.

Now, of course, there is so much context at play here with these setups too.

But catching a falling knife needn’t be so dangerous…

You need:

  • Patience to wait for the pattern you want to see
  • Discipline to pass on trades that don’t setup
  • Iron risk rules for when trades don’t work

Ask yourself “How can I improve the odds of catching the handle AND eliminate the odds of losing my fingers?”

Then you have a plan.

Or stay away and wait for YOUR setup…

Happy knife catching…(please don’t catch real knives FFS)