[Follow The Trend]

Many of you will be aware of the trading phrase "catching a falling knife" - i.e. trying to guess the bottom of a falling share price trend.

While this is something which I know is very dangerous, I have gone against my better judgement on a number of occassions and tried to call the bottom of a share price - with very little success.

I have had much more success spotting the first signs of the trend turning up.

Which approach do you take?

[Soultrader]

I have a very conservative method for catching a falling knife. Im not a great counter trend trader so I always wait for a shift in market sentiment.

One method I use in a downtrend is to wait for a new TICK high. Then I will enter on the next pullback. This seems to work a fairly good amount of times. I may get lucky and catch a nice reversal but it is usually good for a nice bounce.

Anyone else have a countertrend method? I experimented counter trend trading at pivot levels but got annihilated several times. Ever since then I just go with the trend.

[Follow The Trend]

Some nice comments Soultrader.

Have you ever tried averaging down on the way down?

In the past I have put aside an amount of money for a particular investment, and bought on the way down, e.g. invest 25% initially, then 25% lower down, etc. This has allowed me to average my entry price on the way down.

The idea behind this technique is simple - I will never find the bottom, but if I can invest a % of funds at what I believe to be good value prices on the way down, then I should end up with a decent average price. It is human nature to have a knee jerk reaction to bad news, and this can open up great buying opportunities.

If only I had tried this technique more often than investing all funds in one go, when trying to "catch that falling knife"!

[Maverick]

I have read several articles about people trying to catch a falling knife. One called it lizard brain because it is people’s nature to buy at the best possible price. But if you stop and think about it, why would you want to buy a stock that is falling in price? Wouldn’t you rather buy a stock that is going up in price? Unless you are trying to give your money away, which way do you think has the best chance of making you money?

[Soultrader]

I would NEVER average down. Why buy a falling stock? You are wrong and your ego is not allowing you to take a loss.

The only thing I would do in a falling stock is short or liquidate for a loss. Im not trying to be a hero and catch the dead lows. All I want is the meat (the middle of the trend).

Have you made money averaging down? This method is a sure way to lose unless you are playing with deep pockets.

[carter]

Averaging down? Bad, bad, bad.

Thats what happened to alot of Enron employees. Until they no longer owned a stock but a piece of scrap paper.

[ezduzzit]

FTT... you might be falling into a really bad habit. That practice could reward you just often enough to make you think it usually works and I assure you it does not. It will eventually skin you alive and leave you mumbling incoherently in the corner about how little trading capital is left in your account. You sound like a nice guy... I would advise against doing that and let the real crazies strap on their super-mittens and catch those falling knives instead. It makes for great entertainment from the sidelines.

Happy Trading

[Trade Up]

Some decent comments above - while averaging down can work, I would not recommend it everytime.

FTT, I presume that this is something you have only tried a few times?

Why not buy on the bounce or look for stronger stocks - there are enough around!

While we are all Traders, there is no point taking too much risk - after all, we all want to live to fight another day.