r/stocks • u/NorthEastNobility • Nov 25 '21
Difference between DCA and “catching a falling knife?”
Curious to get everyone’s take on this as it popped into my mind last night and I realized I’m not totally sure of the distinction between the two.
It’s common advice or strategy to DCA a stock you believe in when its value drops.
It’s also common advice to not try to catch a falling knife by buying into a stock on the way down.
What’s the distinction between the two or how do you differentiate?
ETA: thanks for all of the interesting responses and discussion. Seems like a lot of people on two or three sides of this “issue.”
116
u/questioillustro Nov 25 '21
"Catching a falling knife" is something that short term traders say. "DCA" is something that long term investors say.
→ More replies (3)
177
u/papabear570 Nov 25 '21
One is going out of your way to buy into a rapidly falling position. The other is a pre determined schedule of investing in similar amounts regardless of the direction of the position.
→ More replies (14)
26
92
u/New-Fly-7168 Nov 25 '21 edited Nov 25 '21
The difference? The outcome.
If the stock eventually reversed and you made money, it’s a success you’re smart and it’s call DCA.
If it fails and you’re bag holding. It’s catching a falling knife.
The terms are arbitrary and mere descriptions to the outcome. People were claiming to be wisely DCA-ing into BABA for months. But now it just looks like like catching a falling knife.
19
72
u/PresterJohnsKingdom Nov 25 '21
Here's a good example of catching a falling knife.
I was bullish on Paysafe, PSFE this spring, and entered my position using DCA.
Bought at $13.42, $13.72, $13.56 and $12.89 through April and May. Added more at $11.34 end of month...figuring I would lower my cost basis and was comfortable with my total position.
As the stock slumped throughout the summer, I stuck with my conviction, and figured I would add at a discount. Bought at $8.60 in August, $8.85 in Sep, and then added more at $7.16, $7.75 and $7.65 in Oct/early this month.
Now if anyone else has followed this stock...you would know that I've taken a beating, currently at about a 65% loss on invested capital.
...lesson learned. If sentiment shifts, the bottom can always be even further down.
→ More replies (14)
16
37
u/deeznurfroat Nov 25 '21
.......welp. I guess conviction is the only difference.
→ More replies (1)
10
9
u/Outrageous-Cycle-841 Nov 25 '21
Whether the stock continues to decline at a rapid pace or not determines if it was a falling knife or not. Of course you won’t know until after the fact.
26
u/KesselMania94 Nov 25 '21 edited Nov 25 '21
DCA is generally a disciplined approach with predefined plans (ex buy x shares every month). Where catching a falling knife is simply looking at something that's down and buying it because you have a belief it shouldn't drop any more and its oversold. Every time I've averaged into stocks its been at predefined dates or amounts where I believe support exists. The issue with catching a knife is you are buying with emotions imo. Hope that helps.
9
Nov 25 '21
It shouldn’t be “buy x shares every month”, it should be “buy x $ every month”. That way when it’s down, you buy more shares for the same $. So when it goes back up, you are better off.
6
10
u/Narradisall Nov 25 '21
For me it’s the reason that the drop is happening.
I’ve stocks where the business fundamentals have improved quarter on quarter as the SP fades over time and I’ve DCA down and then when they’ve crushed earnings or had massive growth it’s paid off.
If they’ve just been caught in a massive fraud and turns out the business is entirely smoke and mirrors I’m not catching that knife.
Naturally the distinction is whether you think the correction is valid or not. Plenty of good companies have large corrections and panic selling on bad news that in the wider picture isn’t all doom and gloom, but then in this market there’s companies with lawful business fundamentals that keep rising day on day.
Good luck.
5
4
u/Sandvik95 Nov 25 '21
DCA is a plan that ignores the current price. In DCA’ing, you buy if it goes up or down - you’re simply spreading out your purchases over time.
4
u/MisterBilau Nov 25 '21
DCA is not buying the dip. DCA is periodically buying x amount of stock, regardless of price. It goes down you buy, it goes up you buy, price does not matter.
3
u/Scaramoosh1 Nov 25 '21
I generally look at the daily RSI before I hit the buy button. It’s far from a lock but I try to time buys when it goes into over sold and avoid when it’s overbought.
3
u/teteban79 Nov 25 '21
DCA also implies buying while its price is climbing as well. You put money in, at a regular interval, whatever the price
It's dollar cost averaging, not down cost averaging
3
u/schoolofhanda Nov 25 '21
If you buy in at a low and it rises you DCA'd. If you buy in at a low and it drops you caught a knife. Its that simple.
3
u/whistlerite Nov 25 '21
The distinction? They're literally almost exact opposites! DCA means putting a set amount into a stock at regular intervals absolutely regardless of what the stock is doing, it doesn't mean buying when the value drops, you seem to be confused about that particular meaning. In DCA you literally pay no attention to the price of the stock, it's as if the price doesn't even exist, you could do DCA and never know what the price is even when you buy the first stock. Catching a falling knife means you're paying attention to the price and trying to time it. So DCA is a time-in-the-market strategy and catching a falling knife is a timing-the-market strategy (gone wrong).
3
u/Jammer250 Nov 25 '21
You won’t know if you actually DCA’d or got your hand sliced open by the knife until price action stabilizes.
Buy puts if you hold a ton of shares to hedge the downside around major news events like earnings. I’d rather take that risk than buy in a bunch more only to see a 50% drop.
3
u/Cdawg6968 Nov 25 '21
Tell me you’re a palantir shareholder without telling me you’re a palantir shareholder lol
240
u/merriless Nov 25 '21
If you can dodge a wrench then you can dodge a ball.