Buying dips or catching a falling knife?

Today there was question in our VIP telegram group about how to make sure that buying a dip in Uptrend does not turn into catching a falling knife?

In other words, how can we be certain that the support level holds up and the price does not just cut right through it and continues to decline.

In trading, there are always risks and nothing is certain. All we can do is read the indicators and signals to improve our chances (probabilities) of success.

When we run a market scan to find assets in Uptrend that have pulled back to their support (see scan results), we can see many promising prospects including LINK, SUI, SKY among others:

But notice that momentum is still bearish: the MACD indicator is still showing “Sell” and the MACD Histogram (blue bars) are declining.

Hence, a more conservative approach would be to wait for price to stabilize and/or bounce up from this support level, giving us some evidence that traders are stepping in at that price. And ideally, with elevated volume.

To find such dip opportunities, a trader can use various pre-set market scans available on altFINS' Screener:

Notice in the above chart how different market scans identify trade entry opportunities at different stages of the pullback.

It's up to the trader to pick which place to enter.

They all have their risks and benefits:

Using the (1) approach identifies trade entry early on in the pullback, which has the benefit of potentially capturing the full upswing (biggest profit).  

It also has the benefit of capturing quick bounce up.

However, it also has the highest risk of failure, whereby the price keeps falling pass the initial support level (in this case $4).  Then it feels like 'catching a falling knife'.

Using (2) approach identifies trade entry a bit later than (1) approach.  It waits for price to stabilize, as indicated by rising MACD Histogram indicator, which can indicate that buyers are stepping in.  But it usually does not capture the full profit potential.

Using (3) approach identifies trade entry later than (1) and (2) approaches.  It waits for price to actually bounce up (MACD Crossover) before a signal is generated. 

That means that this (3) approach is safer, less prone to whipsaw, but also captures less upside (lower profit potential).

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