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Breakout from a base

Lesson 14 · about 11 min

A base is a consolidation that has lasted long enough, usually four to twelve weeks, to shake out impatient holders and let volume dry up. When price clears the top of a base on expanding volume, a large group of buyers is acting at once and there is nobody overhead to sell to them. The breakout is the setup with the highest payoff when it works and the highest failure rate when the regime is wrong, which is why it is allowed in green regimes only.

The pattern

                                              /  <- target 2: measured move
                                          ___/
      pivot ------------------------- ___/  <- entry: close above pivot, vol > 1.5x
      _/\    /\__/\    _/\_/\_  ___/
     /    \_/      \__/       \/   ^ tight, low-volume final week
    /                             
   /   base: 4 to 12 weeks                   stop: below the last swing low in the base

Conditions, all required:

  1. Leader. RS top 20%, within 10% of the 52-week high before the base formed.
  2. Base duration. At least 4 weeks; ideally 6 to 12. Bases under 3 weeks are pauses, not bases, and fail more.
  3. Base depth. Less than 25% from the base high to the base low in a normal market; up to 35% after a correction. Deeper than that and the stock is repairing damage, not consolidating.
  4. Tightness at the end. The final 5 to 10 days are the tightest part of the base, with volume below the 50-day average.
  5. Clear pivot. A horizontal level, the base high or a lower high inside the base that has been tested at least twice.

Entry trigger

A daily close above the pivot with volume at least 1.5x the 50-day average. Either condition alone is not enough: a close above the pivot on quiet volume is a false start more often than not, and a volume surge that closes back inside the base is a rejection.

Entry can be placed as a buy-stop just above the pivot during the session, but only when the regime is green and the last hour of trading is confirming. The default is to enter at or near the close, or the next morning if the close was strong and the open is not a gap of more than 1 ATR.

Stop

Below the last swing low inside the base, or below the low of the breakout day, whichever is closer to the entry while still being more than 1 ATR away. A breakout stop that sits under the whole base is usually too far and produces a position too small to matter.

Targets

  • First target: entry plus the height of the final tight range (often 1.5 to 2R). Take a partial.
  • Second target: entry plus the full height of the base (the measured move). Trail the rest with the 10 EMA.

R:R table

Stock at $88 pivot, base low $72, final tight range $84 to $88.50, last swing low $82.20, ATR $2.10.

Element Price Distance In R
Entry (close above pivot) $89.00 — —
Stop (below swing low) $81.90 $7.10 1.0R
Target 1 (tight-range height, $4.50, added) $93.50 $4.50 0.6R
Target 2 (base height, $16, added) $105.00 $16.00 2.3R

Notice target 1 is only 0.6R here. That means this stop is too wide for this base. Use the breakout-day low instead if it is more than 1 ATR away; if the breakout day's low is $86.50, distance is $2.50 (1.2 ATR), target 1 becomes 1.8R and target 2 becomes 6.4R. The table is the tool that catches a bad R:R before entry.

A $200 risk budget with the $2.50 stop buys 80 shares, a $7,120 position.

Key idea: A breakout is only tradeable if the close is above the pivot, volume confirms, and the stop under structure still leaves at least 2R to a measured target. All three, or no trade.

What invalidates

  • Close back inside the base within 3 days. The breakout failed. Exit on that close regardless of the stop; do not wait to be proven right.
  • Volume under 1.0x on the breakout day. No confirmation. Either wait for a retest of the pivot on low volume with a reversal, or skip.
  • Regime amber or red. Breakouts are simply not allowed. The failure rate in those regimes is why.
  • Gap of more than 1.5 ATR through the pivot. Chasing puts the stop too far away. Wait for a pullback to the pivot.
  • A broad index breakdown the same week. Even good breakouts fail when the tide reverses. Tighten to break-even quickly.

The retest entry

Roughly half of valid breakouts return to the pivot within two weeks. If you missed the initial entry or the R:R was poor, the retest is often the better trade: enter on the first close back above the pivot after the retest, stop below the retest low. The stop is tighter and the target is the same.

Beyond stocks

Crypto bases resolve with more violence and more frequent false breaks; require volume over 2x and a close at least 1% through the pivot. Forex bases on the daily chart are usually breakouts from multi-week ranges ahead of or after central-bank events; the same close-and-volume rule applies where volume data is available, otherwise use a two-day close rule. Futures behave like liquid stocks.

Try it: Find a base of at least 6 weeks that resolved in the last three months. Measure its height, the final tight range, and the breakout-day volume against the 50-day average. Build the R:R table with two candidate stops. Decide which stop you would have used and whether the trade was valid under the volume rule.

Recap

  • A base is 4 to 12 weeks, under 25% deep, tight and quiet at the end, with a clear pivot; the stock must already be a leader.
  • Trigger: daily close above the pivot on at least 1.5x average volume.
  • Stop: below the breakout-day low or the last swing low in the base, whichever gives at least 1 ATR of room and still allows 2R.
  • Targets: the tight-range height for a partial, the base height for the measured move, trail the rest.
  • Invalidation: a close back inside the base within 3 days, low breakout volume, an amber or red regime, or chasing a large gap.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Breakout and retestPrice stalls under one level, pushes above it, comes back to touch it from above, then continues higher.pricetimeold resistancenow support1price keeps stalling2breaks above3pulls back and retests it4and carries on
Breakout and retest. Price stalls under the same level several times, pushes above it, then drops back to touch it from above before carrying on. That touch is the retest, where the old ceiling is tried as a floor. A break that falls straight back under it is a false breakout.
Risk and reward on one tradeA price scale showing an entry with a stop two points below and a target six points above, so the reward band is three times the risk band.PRICETARGET 106.00ENTRY 100.00STOP 98.00REWARDRISK6.00 pointsthree times the risk2.00 pointsthe most you loserisk : reward = 1 : 3
Risk and reward on one trade. One trade on a price scale: the entry sits 2.00 points above the stop and 6.00 points below the target, so the shaded reward band is three times the risk band. The ratio compares what is lost if the stop is hit with what is gained if the target is reached.
A range beside a trendOne chart swinging between a flat floor and ceiling, another stepping upwards inside a pair of sloping lines.Range-boundresistancesupportprice bounces between two levelsTrendingthe trend channelhigher highs and higher lowsA range has two flat edges; a trend has two sloping ones.
Range versus trend. On the left price keeps bouncing between the same floor and ceiling, which is a range. On the right each high and each low is higher than the last, inside a pair of sloping lines called a channel.