The falling knife pattern is a term used in technical analysis to describe a sharp, rapid decline in the price of an asset (such as a stock, cryptocurrency, or commodity) without immediate signs of reversal. The term metaphorically compares the falling price to a knife dropping; attempting to catch it too early can result in significant losses.

Key Characteristics:
Steep Decline – Prices drop aggressively, often due to panic selling, negative news, or weak market sentiment.

Low Volume Initially – Early stages may see low trading volume, but volume often spikes as the decline accelerates.

No Clear Support – The asset breaches key support levels without stabilisation, making it risky to buy prematurely.

Trading Caution:
Traders avoid "catching a falling knife" because predicting the bottom is difficult. Instead, they wait for confirmation of a reversal, such as:

A bullish candlestick pattern (e.g., hammer, engulfing).

A breakout above a downtrend line.

Increased buying volume signals demand.

Bottom Line:
The Falling Knife Pattern warns against impulsive buying during sharp declines. Patience and confirmation of trend reversal are crucial to avoid losses.

The falling knife pattern refers to a sharp, rapid decline in an asset's price, often resembling a knife dropping straight down on a price chart. It signals strong selling pressure and panic among traders, making it a high-risk scenario.

While some traders attempt to "catch the falling knife" by buying at low prices for a quick rebound, this strategy is dangerous—prices may continue plunging. Instead, prudent traders wait for confirmation of stabilization, such as:

A slowdown in downward momentum

Bullish reversal candlesticks (e.g., hammer, engulfing)

Support level bounces or trendline breaks

The pattern is common in volatile markets or during panic sell-offs. Risk management (stop-loss orders, position sizing) is critical if trading it. Always combine with other indicators (RSI, volume) to avoid premature entries.