10 Steps to Buying Stocks in a Bear Market — Page 3 | Stock Trading Strategies

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10 Steps to Buying Stocks in a Bear Market — Page 3

2. Define a Buying Range

Once you have chosen the stock(s) you would like to leg in to, you need to define a price range in which you would feel comfortable buying the stock. For some, you may only feel comfortable buying the stock at a specific price. For others, you may feel comfortable buying the stock within a specific range. In most cases, you will need to define a range in which you are comfortable buying because when you are legging in, it is virtually impossible to get the same price on each transaction.

When you are defining your buying range, you need to ask yourself the following two questions:

1. How long am I prepared to hold this stock if it goes up?

2. How high do I think this stock can go during that time frame?

For this example, let's say you are willing to hold onto ADM for a year or two, and you believe ADM is going to completely retrace the fall is suffered beginning in April 2008—which would bring ADM back up to $49. If ADM does completely retrace its most recent down trend and you were able to enter at its current price of $26, you could almost double your investment—making $23 per share as the stock moves from $26 to $49.

Of course, you don't need to buy all of your shares exactly at $26 per share. Since you are legging in, you will have a price range in which you are comfortable purchasing ADM, just in case the stock starts to go down.

To help us identify a price range in this case, I am going to put a Fibonacci retracement on the chart to show where some potential levels of support and resistance may line up as ADM is trying to climb back up to $49. As you can see, ADM is currently just below resistance at $27—which lines up with the 38.2 percent Fibonacci retracement level.

[To learn more about Fibonacci analysis, check out Fibonacci Analysis for stocks—one of our easy-to-understand articles and videos.]

Seeing this resistance level at $27 tells us that the stock price may move down a little bit in the near future. This isn't a problem. It is just part of the natural ebb and flow of the stock price in an up trend—it moves up, and then it moves down a little, then it moves up again, and then it moves down a little. What we learn from this is we will probably need to define a buying range that allows for the stock to drop a little bit. In this case, let's set our buying range between the resistance level at $27 and the support level at $24. This will give the stock a little wiggle room if it drops but will prevent us from getting in if the current up trend reverses itself.