Home › Market News › Don’t Try To Catch The Falling Knife!
The falling knife scenario is a violent one-directional move lower, making it very difficult to get in or out of the market. When a trader starts to look for buying opportunities too early on in the move lower, we refer to that as trying “catch a falling knife.” With their many years of experience as professional traders, this week, the Topstep coaches are discussing some of their run-ins with runaway markets and share a few tips that might prevent you from getting cut by a falling knife!
Talk about a practice in patience! Coming off one of the worst down moves in years, funded trader Manuel A. waited for the right opportunity to get in the market and walked away with a stellar $3,600 trading the E-Mini Nasdaq-100 futures (NQ). Not too shabby!
Picking bottoms is not easy, especially when volume and volatility are spiking. Of course, it’s common sense to assume that the market will hit bottom eventually, but when prices keep blowing right through all of your support levels, how much money are you really willing to risk trying to pick the next bottom?
Maybe you’ve heard someone say, “if you weren’t in when the break started, you missed the move.” This statement isn’t necessarily true, but it’s not necessarily false either. There is some nuance to this. It would be unwise to indiscriminately jump in and short the market when it starts crashing from a risk management perspective. But, there are still opportunities available to you.
If you’re only keeping track of a single futures contract and you feel you need to be in on the move, it would definitely be better to wait for some kind of pullback, even if it’s just to give you a vague idea of where a future point of invalidation might be. Taking a long position in a market environment like a falling knife is not likely to be a trade you want to fall in love with. Instead, it should be considered a short-term trade with minimal risk. Remember, missing a piece of the move is always better than getting run over by a runaway market.
When the market is tanking, and the swings are getting wider, it’s never a bad idea to cut down on your trading size. Scaling back on the number of contracts you’re trading will allow you to expand your risk parameters for every trade and give you a fighting chance to catch a bigger piece of the move. After all, since it’s unlikely that we will ever pick the exact top or bottom of a big swing, it is our job, as day traders, to try to capture a piece of the middle of the range.
One more thing, another way to avoid getting hurt by a falling knife is to simply get out of the way. If fast markets aren’t your thing, then take a step back and wait for things to die down. Don’t let the fear of missing out get you into trouble!