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Knife Catching Usually Ends with Bloody Hands

Knife Catching Usually Ends with Bloody Hands

My favorite method to avoid catching the knife reduce FOMO and find better R:R trades.  



I know that everyone on FinTwit always buys the exact bottom and top, how do I know this? Well it’s simple, they always brag about those 0 MAE trades :).


Selling the exact high and buying the bottom tick sounds cool and all but there’s a better and repeatable way to find a better R:R trading opportunity that doesn’t require the stress of catching the top or bottom tick.


Before we continue, yes I understand that it is human nature for many traders to want to fade a large trend up or down. Most often I hear things like “we’re oversold or it's just gone too far too fast” , well listen here, the market doesn’t care, it will do whatever it needs or wants to do. If I know one thing, it is that the market will go farther and longer than you or I could have imagined. That’s just a plain fact.


Ok so we should not be fading large trend moves as a general rule of thumb, we are clear on that now. How do we find tradeable opportunities without being a knife catcher?

I’m glad you asked, let’s walk through some examples.


In this example we have an impulse move that creates a new low, we take our handy dandy retracement tool and draw from the swing high to the swing low, and look for a pullback of about 55% - 65%. I have found that zone to be about the sweet spot. I would look in this area to position for a continuation short.



Another example


Yep, fully aware this breaches the zone but because we are talking about real trading and not cherry picking this is definitely still a good trade setup but extends just above our zone and with proper execution / risk management it's unlikely you get stopped out, but if you do that’s ok because thats trading.



Here’s an example on the long side. Same tool / same settings.



Another example where the zone is breached but still sticking to the same method we are consistent in how we are drawing the zones.



Here’s an example of a much large trade setup, as you can see these areas can setup on many time frames so you want to be aware of where you are in the bigger picture. This is somewhat of an obvious statement but you should always be aware of larger time frame



Here’s an interesting combo trade where you have the prior trend day higher, the overnight push down which provides sell opportunities on the retracements but from the larger move of the prior day you get nice responsive bids on the retracements of that move.


So, let’s talk about some of the nuances:


  1. We are looking for an impulsive move up or down , how much? Well it depends on your timeframe and style, as you can see above there are several examples of small impulse moves you can look at as well as large ones, that part is subjective.
  2. If you have large moves the zones will be larger and so will your risk/reward vs a smaller move that gives you tighter risk to reward.
  3. Where do you place your stops?? Again another question that is personal but it should be placed appropriately to the overall structure. I would argue that the closer you are to the prior swing low or high the more likely the trade is to fail and so your stops would be well before those.
  4. Isn’t this just fibs? Not really, but if you want to use fib sequences for the zones you definitely can. I’m simply interested in finding the most optimal spot for entry to continue the prior move.  
  5. I should take every zone? No. Like any trade setup you should use these areas in conjunction with what you already know.
  6. Adjustments for sell zones vs buy zones, I have found that markets will re-offer much shallower than they will be rebid. When setting this up for my own trading I use a bit of a steeper pullback retracement for buy zones. Closer to 60%-70%.


So why is this better than just catching a knife?


Let’s be honest, you aren’t putting any bottoms or tops in the market with your trade sizing. You should be looking for larger participants and their willingness to engage aggressively to put an impulsive move higher or lower.

Then look for that retracement zone to engage now that you have an idea that sellers or buyers will want to re-engage on pullbacks to the on the initial impulse. Not only that, but you have some structure above or below you to reference for risk management.


Look, I know it’s super disappointing that you won't be calling tops and bottoms but you will be engaging with better R:R opportunities because you are leaning on prior market participants who have already shown their willingness to engage in an area. And I call that a win.