Why shouldn’t you try to catch a falling knife?
You can check the answer of the people under the question at Quora “knife catch“
About Remi
Written by: Remi
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Why shouldn’t you try to catch a falling knife?
You can check the answer of the people under the question at Quora “knife catch“
About Remi
As the phrase suggests, catching a falling knife will always hurt you and wound you.
In our conventional upbringing, we are always taught the virtue of buying cheap, buying at low price, bargain purchase so on and so forth. Perhaps that’s one of the reasons that we all go hyper to buy during Sale period.
But when it comes to stock market, the psychology that works is different
Efficient market hypothesis says that current market price of any stock factors all the available information, and all participants (buyers and sellers) know that information. Therefore the current price is a balance price that has been arrived between the buyers and sellers.
Having said that, now think that if the price of a stock is falling fast, it means that there are substantially more more sellers than buyers. And there must be some underlying reason for this.
In stock market, we have to trade with the trend. TRE…
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When a stock is falling continuously, you should have to have patience to wait and not to get tempted to buy.The stock or security may lose all of its value, as in the case of a bankruptcy. This concept is called as “not try to catch a falling knife”
For example PC Jewelers, Yes Bank, Dewan Housing etc.
Wait for the price to bottom out before buying it.
Image Source: Google Image / Trade Brains
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Imagine a knife falling from the terrace to the garden, would you catch it?
Ofcourse you know why wont try to catch it,right? Because the probability of getting yourself hurt is more when you try to catch it.
Similarly, ” Don’t catch a falling knife” is a phrase generally used while dealing in stocks.
What are the first few reactions that come to our mind whenever we see a big fall in a company’s stock price?
This is it.
The price can’t fall further.
This is exactly the right time to invest.
The only direction where the price will now go is up.
The street is overreacting, let’s buy it now. Otherwise, we will miss great returns.
But do you think buying such falling stocks will necessarily yield return/profit? There are several instances where there has been no gain but incurred losses further.
You should research deeply to understand the cause and direction of falling knife before really investing in it.
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The term falling knife suggests that buying into a market with a lot of downward momentum can be extremely dangerous – just like trying to catch an actual falling knife …More ever , even buy and hold investors can use a falling knife as a buy opportunity provided they have a fundamental case for owing the share.
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