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TSX trader watches the action

CHRIS YOUNG/Chris Young/CP

How do you catch a falling knife without getting hurt? Many investors salivate when they see a stock falling sharply, knowing in their heart of hearts that a rebound will occur. Timing is the tricky part, though. Barry Ritholtz at The Big Picture has a few guidelines to help take out some of the guesswork - a process that worked well for him after BP PLC's sharp decline last year, and subsequent rebound.

He has three ideas: Scale in over time, look at the 40 per cent below enterprise value price and wait until an upside break over the 20-day moving average for a freefalling stock.

"These are all general methods that can be as applied to any name, not just BP," he said. "Any stock can be a winner on a purely random basis; what matters more than any single successful outcome is a repeatable methodology."

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Take note, Sino-Forest Corp. investors.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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