This post is written by Jet Toyco, a trader and trading coach.

Let me ask you…

Have you ever ever got “hyped” right into a trading position after which gone all-in?

You get empty guarantees and hope like…

“This crypto goes to the moon, it can triple in price, guaranteed!”

“I actually have an insider tip on this stock, this may surely quadruple in a number of days!”

After which what happens?

That’s right…

It often all the time goes the alternative way.

It’s just like the market knows whenever you buy and it all the time crashes whenever you do!

Then, you began pointing fingers…

“What on the planet is Elon Musk doing?”

“It’s all of the President’s fault!”

“I shouldn’t have listened to those silly traders”

Now…

What if I told you that there’s a way find out how to see through all of those BS?

What if I told you that there’s a strategy to make the most of sharp market crashes freed from other people’s opinions?

That, my friend…

That is what you’re going to learn in today’s trading guide, which is to discover and trade Falling Knives.

Sounds good?

So, here’s what you possibly can expect in today’s training…

• A temporary introduction to what a falling knife is
• The right way to consistently spot and discover a falling knife so that you simply’ll never second-guess yourself
• An entire falling knife trading strategy (and a few extra tips about find out how to reduce risk and increase reward)

Are you able to go?

Then let’s start…

What’s a falling knife, and the way does it work?

Sure, I gave you some decent examples of falling knives some time ago.

Nevertheless…

Those charts are cherry-picked (I have to admit).

It signifies that in the actual world of trading, falling knives don’t look the identical.

That’s why we must return to the fundamentals my young padawan!

So…

A falling knife is solely when a market experiences a pointy decline.

You could be wondering…

Why is it called a “knife?”

Well…

It’s called a knife because it may well slice through your account balance just as easily as a physical knife would!

So, in case you spot market declines like these…

These aren’t falling knives!

Those are mini punches, ones that you could handle!

So, let me provide you with an example of a Falling Knife large enough to pierce your trading account in half…

On last April 2022, Netflix published an earnings report.

Nevertheless, the report showed that Netflix got fewer subscribers and is predicted to say no further.

Are you able to guess what happened next?

Boom, a 37% decline!

A Falling Knife that pierced through investors’ and traders’ hearts alike!

Should you attempted to purchase after a pointy decline like that, or, should we are saying, a Falling Knife…

I wouldn’t be surprised in case you second-guessed and asked yourself…

“Oh shoot, Netflix dropped much more, have I made the precise alternative?”

“Is it not the underside yet?”

Your confidence can be shaken, and rightly so!

Sure, the worth eventually rebounded based on this instance…

But keep in mind that this too was a falling knife…

Until after all, it prolonged and have become a Falling Katana (hah).

On this case, what would you do?

Hodl?

Exit?

Pray?

Hope?

Don’t worry…

I’ve prepared a piece for you in a while that exactly answers these questions.

But do know that each one Falling Knife scenarios are not the identical in addition to how it may well affect you psychologically.

And by the way in which…

Falling Knives can occur with or with none fundamental news (it’s true).

So!

Since I shared with you the “psychological” aspect of trading with Falling Knives and likewise now that you recognize what it looks like…

You could be wondering:

“How EXACTLY do I do know if it’s a Falling Knife or not?”

“Is there a certain percentage?”

“Which indicator do I want to make use of to know if it’s a Falling Knife?”

Let me let you know…

Those are some excellent questions!

But rest assured that I’ll answer them within the section.

Ready?

Then keep reading…

An in-depth guide on find out how to discover a Falling Knife

Here’s the reality:

Trading falling knives are dangerous.

It doesn’t matter how good you’re as a trader or how good your gut feel is.

It’s dangerous!

This is the reason it’s essential to know what exactly is and isn’t a Falling Knife!

So, let me let you know this primary…

There can never be a single metric or indicator to define a Falling Knife

Take a have a look at this:

The “sharpness” of this Falling Knife got here all the way down to 20% before rebounding!

Then again, check this out:

Same market.

Same Falling Knife example.

But different form!

This stock crashed all the way down to [percentage] before rebounding.

The identical principle applies in Forex, Commodities, Bonds, and particularly…

The crypto markets!

A 43% decline before rebounding!

Well…

I’m sure crypto hodlers are pretty used to it by now, how -50% to -99% declines are pretty normal, but you get my point.

So why am I telling you this?

Here’s why:

Because there isn’t a specific metric or technical indicator that may define a Falling Knife.

Sure, indicators similar to the Average True Range (ATR) might help out, but as a substitute…

Listed below are the 2 things that it’s best to concentrate on.

First…

A big-bodied candlestick

There are only three sorts of candlesticks on the market.

Small wick with an extended body.

Small wick with a small body.

Long wick with a small body.

So, which candlestick must you spot when on the lookout for Falling Knives?

…

…

…

That’s right, a LARGE-bodied candlestick!

This is strictly what defines a Falling Knife!

But we’re not done yet.

Since the second thing that it’s best to search for in defining a Falling Knife is…

A big-bodied candlestick relative to other candlesticks

Let me explain.

Do you see these candles here?

It just about looks like a standard day, candlesticks living in peace.

After which this happens…

Boom shakalaka!

It’s just like the last candlestick just slaughtered every previous candlestick!

So, without second-guessing or squinting your eyes, I’m sure you possibly can agree with me that this can be a Falling Knife, right?

Good.

So just a fast recap, it’s a Falling Knife when these two things occur…

When the market makes multiple big-ass bearish candlesticks.

And when it’s clear as day that it’s greater and meaner than the remaining.

Easy, right?

Alright!

Now that you recognize what it’s and find out how to discover it Falling Knives…

You’re now able to dive in to know find out how to trade the Falling Knife.

Be sure to take notes as we won’t just concentrate on entries and exits…

But additionally risk management techniques on find out how to reduce your risk and increase your rewards when trading Falling Knives.

Excited?

You rattling ought to be!

So, keep reading, and let’s go!

A step-by-step guide on find out how to trade a Falling Knife successfully

You’re probably going to get indignant at me for saying this but here’s the thing:

We don’t exactly “catch” and enter because the knife is falling.

Should you can’t do this in real life, what more in trading?

As an alternative, what can we do?

We enter after confirmation.

That’s right, we would like to know “how long” the knife is.

Because then we’ll know the bottom it may well stab the markets!

Don’t worry my friend, I’ll explain.

Step 1: Confirmation

After all, spotting a falling knife based on what I’ve shared with you before is the very first thing.

So, whenever you see this, do you purchase it?

When this market is already on the news, do you purchase?

 

When your folks and family are hyping up this market promising you x10000 returns, do you purchase?

No, my friend…

You wait for confirmation.

You narrow yourself out of the “noise” and follow your plan.

So, what happens now whenever you see this?

Finally!

You’ve waited for therefore long, a green candle!

But do you purchase it?

Not yet!

Because to confirm this Falling Knife setup, we must dig deeper down into the lower timeframe…

Step 2: Transition trade setup

That’s right, when you see the primary green candle after a pointy decline, you go all the way down to the lower timeframe.

On this case, I showed you an example of ETHUSD on the 8-hour timeframe, so we’re digging down into the 1-hour timeframe.

So, now that you simply’re within the lower timeframe, what are you on the lookout for?

A break out of a bullish flag pattern.

In case you’re wondering, here’s what it looks like:

And where it’s on the chart:

Alright now, this is significant…

Once there may be:

• A legitimate Falling Knife on the upper timeframe (In this instance, I used the day by day timeframe)
• A primary green candle from that Falling Knife
• A bullish flag pattern on the lower timeframe (In this instance, I exploit the 4-hour timeframe)

You have got one last confirmation before you hit the buy button.

Are you able to guess what it’s?

It’s easy, a candle close!

A candle close is a single event that confirms every part we saw.

Not an assumption, a confirmation!

Once that happens you would like to enter at the following candle open, with stop loss below the flag pattern:

Is sensible?

Now, what’s next?

Well…

This one’s a bit tricky.

Nevertheless, this system can potentially reduce your risk while increasing your rewards.

Step 3: Risk Management

Regardless of how good you’re as a trader or how good your gut feel is, trading Falling Knives is dangerous.

Keep in mind that line from some time ago?

Good, because that continues to be true.

Since we are able to’t change the undeniable fact that trading Falling Knives is dangerous, what can we alter?

Our risk management.

What do I mean?

Before you enter Falling Knife setups we discussed similar to these:

 

You need to be sure that you risk half than usual.

So in case you enter trades with a 1% risk per trade, it’s crucial that you simply first enter with a 0.5% risk per trade.

Meaning, when the worth hits your stop loss, you won’t lose greater than 0.5% of your account.

Yes, the rewards are almost non-existent but you first want the market to substantiate your trade before you fully commit!

And what if it does?

You scale into the trade, after which move your stops to breakeven!

Clever, am I right?

And mind you, this idea doesn’t just apply to Etherum, it applies to other markets on the market!

So, remember…

Risk small, after which commit to the trade by scaling in because it makes one other bull flag breakout.

And at last…

Step 4: Trade Management

This step is crucial step of all.

Why?

Well, how else are you going to make a profit?

So, identical to the remaining.

There should be a rule in place on how it’s best to manage and exit your trades.

And the best strategy to do it?

Is to set your take profit area before the Falling Knife happened.

On the “handle” of the knife.

Since a Falling Knife crashes, there’s barely any room for potential sellers to get in because the “roof” is just too high!

Now, notice that we’re defining your take profit at the upper timeframe which the the 8-hour timeframe in this instance.

That’s right!

As you time your entries on the lower timeframe, on this case, we manage our trade on the upper timeframe.

This is known as transition trading, and it’s the identical method is that provides us such a MONSTER risk-to-reward ratio!

So now you could be wondering:

“Hmm sounds cool, but what if the worth just smells the take profit area after which reverses?”

“What do I do if the worth never reaches the take profit area after which goes back again to my stop loss?”

If that’s you then boy you sure are pretty rare!

Most traders don’t even query once they should exit their trades.

Saying…

“Ah I’ll just hold this for 10 years and leave or not it’s”

“I’ll know, I’ll let my gut feel resolve when to exit”

But after all, that’s not you!

So, what do you do in case the worth doesn’t reach your take profit area?

We use a short-term trailing stop loss.

That’s right, two things!

A brief-term…

Trailing stop loss…

There’s a few popular trailing stop loss on the market similar to:

• Moving Average
• Average True Range
• Donchian Channel

And possibly more.

So, what you do is pick one which is smart to you probably the most, and select a “tight” period to trail your stop loss in the upper timeframe!

For example, we’ll use a moving average to trail our stop loss.

Which means that we won’t exit our trade unless it hits our take profit, or hits and closes below the moving average!

Again!

Short-term…

Trailing stop loss…

So, on this case, we’ll use a good moving average period of 8.

Sure, you need to use 10 MA, 6 MA, and seven MA, it doesn’t matter.

What matters is that you simply are using a short-term trailing stop loss!

So in this instance, we are able to see how the worth didn’t reach the take profit level and hit our trailing stop loss.

Sure, it didn’t hit the “jackpot” take profit area you plotted, but still, you possibly can secure some profits.

Sounds good!

Now, if you would like to learn more about trailing stop loss (which again, you possibly can apply using the concept I taught you), you possibly can check this out:

The right way to Use Trailing Stop Loss (5 Powerful Techniques That Work)

So before I end, let me give a temporary disclaimer for you.

This is significant.

Disclaimer

I do know I sound like a broken record.

But trading a Falling Knife is dangerous.

So, as much as possible…

I need you to check this in your end and see together with your own eyes how the sting of this setup unfolds.

Finally, Falling Knives do occur in every market and timeframe, but It’s crucial that you simply:

• Select a timeframe that you could consistently commit to (don’t jump around timeframes)
• Know that Falling Knives don’t look all the identical, and may look different from the instance I showed you simply now

With that said…

Let’s do a fast recap of what you’ve learned today!

Bottom Line

• A Falling Knife happens when the worth makes a pointy decline in a brief period of time
• Falling Knives don’t look the identical, but one objective strategy to define it consistently is to be sure that that the large-bodied candles are greater than the remaining
• When trading Falling Knives, you could wait for a green candle to form, and search for a bullish flag pattern on the lower timeframe which then you need to use a hard and fast or trailing stop loss to capture a profit.

There you go!

I hope you found this text informative and enjoyed reading it. 

So now over to you…

Would you trade the Falling Knife strategy?

Also, do you recognize someone who lost a whole lot of money from Falling Knives?

Let me know within the comments below!