10 Steps to Buying Stocks in a Bear Market — Page 4 | Stock Trading Strategies

Follow us:

Twitter

RSS

Facebook

10 Steps to Buying Stocks in a Bear Market — Page 4

3. Set a stop-loss level

When you buy a stock, you always face the risk that the stock price may turn around and begin moving lower. Seeing your stock price drop a little bit after you have bought it is okay, but if the stock price begins to fall too far, you need to do something about it. Remember, you are buying stocks to make money, not to sit and hold onto them in the hope that they will eventually make money when, in fact, they are losing you money.

To help you avoid losing too much money on any one stock, you need to identify a price level at which you are going to sell the stock if it drops to that level. This is called your stop-loss level because it is the level at which you are going to stop your losses.

[To learn more about stop-loss orders, check out Managing Stop Losses—one of our easy-to-understand articles and videos.]

Perhaps the most important aspect of a stop-loss level is you set it before you even get into your trade. Before you buy, you need to know when you are going to sell. This will help you in your risk management. It will also help you take your emotions out of the equation because if you set your stop-loss before you enter the trade, you are doing it at a time when you aren't losing any money. If you try to set your stop loss once you have already started to lose money, you will find it is much harder to identify a level at which you want to sell because you start telling yourself that the stock is going to come back if you just hold on long enough.

In our ADM example, the stock established its last major support level at the 23.6 percent Fibonacci retracement level at approximately $22. This level will serve as a nice stop-loss level

Now, when you are setting your stop-loss level, you don't want to set it right on the support level. Instead, you want to set it just below the support level. In this case, let's set the stop-loss level at $21.

This special report continues on the next page...