Don't Catch A Falling Knife and Trend Is Your Friend

By now you may have heard these two phrases. They are very popular because so many people find themselves benefiting or getting burned by one or the other. This book is written by experience largely, so to stay true to my intention of writing for about investing for the regular guy, I'll humbly confess that it seems like lately I have been trying to catch falling knives! After careful research finding good company fundamentals this has happened. I buy stock and then the stock almost immediately falls. In essence I've caught a falling knife and boy does it hurt! So what this means is that I've stabbed myself. And in order to heal, I've got to wait it out until things get better. What are these things?

-Investors/traders sold for a profit. Price has plummeted and know we wait for other investors to find this new bargain and start buying the stock to bring the price back up.
-An earnings report came out just after our purchase and the report did not meet or exceed street expectation. Price drops as investors sell off quickly trying to hang on to their profits.
-News of another company in the same sector was bad and it took our stock down with it. We now have to wait for the news to be forgotten and the buying of our company to resume.
-Reports from the likes of unemployment, consumer price index, transportation, and manufacturing are bad and have cooled the sector and our stock. Either the next version of the report is better or another news reverses the buying sentiment of our stock.

While it is next to impossible to avoid all bad news, try to find out if your company has any earnings report due in the near future. This is usually a big one, so unless the anticipation is that the report will soundly will beat the street, hold off until after the earnings report to decide weather to buy. But have both hands on the wheel because if the earnings report is great, you'll likely want to get in as fast as possible to catch profits as people and institutions dive in the pool head first. Typically there is a calendar of reports which either happen weekly, monthly, or quarterly. One of your web sites or newsletters may clue you in on when these are due to come out. In any case, find out and decide if this could hurt your stock if it turns out to be bad. If so, wait until after the report before buying. If you are trading vs. investing and the report is not due for awhile, take advantage of the usual trading range to make profits and then sit it out before the report and resume if all is well.

And so there you have it. It is very easy to catch a falling knife without doing it intentionally. So that is where trend comes in. Trend is your friend. Which means that if you follow the trend as if it were your chum or your mentor, you will not likely be stabbed by the falling knife. Does it mean that you chase a climbing stock? Not necessarily. But it absolutely does mean that you do not buy a stock when you see that the price is falling. Otherwise you'll be catching that falling knife. Even though a stock you strongly believe in looks like a bargain because the price is falling and you know that that decline is only temporary, just wait! Wait until it stops falling, stabilizes and shows that it has strong support to keep moving up in the short term. Use lines of resistance as your guide. Although it seems like you'll miss out on profits, this is the safe way to go about it.