Catching a falling knife Or buying the dip?

There is always a saying never catch a falling knife but there is also a saying buy the dip. So what is the difference?

1) Buying the Dips

Basically when you buy a dips, the overall trend of a stock or ETF remain on track, continue in an uptrend. You can determine the trend simply by:

• A clear support and resistance is on a uptrend
• The moving averages. 20MA above 50MA, 50MA above 200MA.

• Higher low, higher high.

2) A Falling knife

When it is a falling knife, the uptrend of a stock or ETF had already broken, thus:

• The support and resistance is a clear downtrend
• Once the 50MA is below the 200MA it is a very clear falling knife
• lower low, lower high

3) So what should we do when we are holding the stock before it plunge?

If you already holding the stock before it fall, if there is no change in it fundamental, just continue to hold. Do not panic sell.

4) Falling knife as an opportunity

Assuming you are buying a great buisness, the fundamental is great, the fall in price is just due to market over-reaction or fear.

1) You should be paitient. Wait until the price start to stagnent. All the bear who wanted to get out had already get out. You can start "nibble" into it. Should not go all in yet, as you do not know how long will this last. Sometime a bad news can send the price spiral down again.

2) Wait for the trend to reverse, you can start to make big purchase. Look at moving averages and support/resistance or any other TA indicators you comfortable with.