Catching a falling knife....

Discussion in 'Trading' started by dac8555, Oct 27, 2006.

  1. dac8555


    In a few other threads..people have been talking about when and how to take a bounce play...citing RHAT today as an example. I thought it was a TERRIBLE way to do the bounce i wanted to start a thread to help people recignize so HIGH ODDS LOW RISK bounce plays...not just "gut feeling" plays.

    here is how i do it...anyone can feel free to add to this.

    1. If you want to buy something after a huge sell off...makesure tere is a compelling reason to buy

    2. I perosnally have a list off 100 stocks that i follow with super high Relative strength and earnings growth....this si my long list...thanks to William oneil. I narrow it down from there based on liwuidity. min 200k shares

    3The overall trend should be UP on the stock. my initial scan on this is the 1 year chart...i just FLY thorugh 100 graphs looking for a HARD pullback.

    3. When i find a hard pullback i look for lines of support or nearby

    4. form there I look at the 50, 200 MA for support

    5. after that i look for "exhastion" on the volume...super high volume selling.

    6.From there i make a list of about 10 candidates or so that MAY qualify.

    7. Thos 10 i wach like a haw for a revaersal...DONT BUY until the bugger start going back up...DO NOT JUMP THE GUN ON will lose more often than win. Watch them like a hawk.

    8. when you enter set a stop at the same days low price. dont enter more than 5% from the low of the day.

    9. Ideally...the indices should be going the same direction.

    10. make sure you have 3:1 RR never risk more than 1% of your overall capital

    if ANY of thes things dont exist..i dont take the trade.

    RHAT, did not make this screen today...but a good example was PRXL.

    Next week i am looking at HITT for the same entry.

    good luck, hope this helps.
  2. :(
  3. dac8555


    sorry has been in a downtrend for MONTHS and well beloe 50 and 200 MA...if someone made money great..but...the odds are it will keep goig down. the trend is your friend!
  4. dac8555


    i am putting together my watchlist for next guys want to see it? If there is no interest, i can go play golf instead!
  5. I'd like to see it. And tell me what you think of HITT... I'm bullish, but i'm going to wait for confirmation tomorrow, or possibly the day after that too. I HATE when I get into a position, then it just trades sideways for a week. lol

  6. a5519



    quite detailed and with sound reasoning backed description of your strategy, compliment.

    The only arguable and very important point is the first: "make sure there is a compelling reason to buy". Rephrased it means: "know why it will go back". It's very difficult to know. There are cases when it's possible with high probability to assume it will not go back soon (e.g accounting problems, the only drug in the portfolio rejected). But other cases: missed/exceeded (not enough) earnings expectations, lost signifficant contract, downgraded by analyst and so on ... From case to case the reaction is very different, depending on who are the main owners and what's their current mood.

    But such trades, as you poited out, require early entry, well before it's clear where the trade will go. Therefore, they are very risky (the falling knife). And one more point, the strategy is not very well scalable. There are not so many opportunities, the conditions are quite tough. And the volume of the trade must be very limited in order to survive the case of the second falling knife.

    It could be I'm wrong and everything is much more simple. But my impression is that the strategy is very time consuming on the
    analysis side and requires very good execution skills. Post some charts of your successful and losing trades. It will bring more entertainment to the thread.

    By the way, also the expert in trading pull backs (may be not the falling knife) is lindq, allways nice to see his comments.
  7. dac8555



    1. The compelling reasons are a. the fundamnetal analysis (the IDB 100)..easy to get. and the support, resistence, 50,200 MAs, and trendlines. not so much "difficult to know"..just puttung odds in your favor. I dont know anything...i just try to make it better than 50.50.

    2. NO EARLY ENTRY!!!! wait til it bounces! that is the low risk.

    3. not terribly time consuming...i have compiled a list over time... but once the list is made, it can check all 100 stocks in about an hour to have my next days/weeks checklist. I look for pullpacks and BIG pullbacks. the BIG pull backs are the falling knives. By the afternoon, i am normally bored.

    4. I have ZERO execution skills, i dont even use Level 2...i HATE level 2. I just have a check list with prices close to where i would like to enter.

    5. I agree, id love to hear more feedback.

    6. a couple examples of pullbacks and knives i look for would be would be GROW, LIFC, CRS, MTX, ISYS, HITT, WEBX

    I dont think it is difficult, it just takes time to adapt something that works for you and that you are comfortable with.
  8. billp


    Curious. What's the success rate, how long do you usually hold and how long have you been doing it. Thanks.
  9. Its nice to see some people on here putting in some hard work and finding out the best way to make money in the markets using probabilities. Just a little advice, usually when buying in an exhaustion zone you will notice you get a lot of sideways action, washing out lows and definately retests about 70% of the time. This may cause emotions to arise and have you take profits to soon or get stopped out. To really get into a low risk position, just wait for a 78.6 Retrace or buy a retest with a tight stop. The move will be explosive most of the time and your mind wont get the best of you. You may also want to trade in units. Have 3 units equal your max size for a trade. Throw a limit in at the knife price that is 1 unit, buy another unit on a retest and then buy a pullback once the move is confirmed with the last unit. I trade some higher time frame strats like this and it works very well. It also allows for me to stick to my plan without chasing trades etc..
  10. Cutten


    The best way to catch a falling knife is to look for massive price overextension on the downside on one timeframe, and then to shift one or two timeframes down and wait for the downtrend to reverse. For example, you want something that on weekly/daily charts has gone down hard, but on 1 hours charts has stopped falling and is now rallying quite powerfully. The extension on the longer timeframe is there so that you only buy things that are heavily oversold. The uptrend on the shorter timeframe is so you only buy things when the immediate momentum is in your favour. Finally, this is a limited risk approach since you use the recent low as your stop.

    I also prefer to overlay sentiment & reaction to news as well, to increase the odds. In other words, sentiment should be very bearish, and ideally the bounce started occuring once the market shrugged off some bad news.

    The way to stay in the trade is to use a momentum approach with a trailing stop below the most recent significant low on the shorter-term timeframe. If you get stopped out, start scaling in again if a new high is made on the shorter timeframe.

    A good example of this sort of trade was the summer lows in the Nikkei.
    #10     Oct 29, 2006