Learning Article : How To Trade Stocks: What Is A Base? And How To Use Stock Charts To Win Big

If you’re new to investing and struggling with the features, screens, and unique charts of MarketSmith India, you may have wondered what a “base” is. You may have wondered why MarketSmith India uses the term a lot in its market-related coverage.

Treat “base” as the most important four-letter word in your investing vocabulary.

Are you willing to learn about, then find, the good bases? Can you muster the courage to buy shares on strong breakouts to new highs amid a general market uptrend? If yes, you stand a great chance of delivering big returns to your stock portfolio.

Why Bases Form

A base visually represents a great stock’s need to take a break. After a nice run-up in price, preferably 30% or more, such a stock will decline – in most cases, mildly. This is often the beginning of a new base. At some point, demand among mutual funds, banks, hedge funds, pension plans, and the like suddenly spikes. So, does the stock’s price. A breakout past a base’s proper buy point begins.

Think of a base as similar to what mountaineers set up when they challenge the summit of K2 or Mount Everest. They don’t go all the way up in one straight shot. Instead, they set up base camps along the way. Climb. Rest. Scale higher. Rest again. Climb again. Pause, then reach the top.

Charts Are A Must-Have Tool

You need to use good price-and-volume stock charts in order to spot the most reliable bases identified by MarketSmith India. They are the cup with handlethe double bottomthe flat basethe saucerthe base on basethe high, tight flagthe ascending base; and the IPO base.

All of these bases have strict requirements and particular specifications. Yet all of them will show the same signs of institutional support and buying. Bases reflect the human emotions of fear and greed, interacting together.

Following is the checklist for proper base patterns:

Cup-with-handle base

Double-bottom base

Flat base

Prior uptrend of at least 30%

Prior uptrend of at least 30%

Prior uptrend of at least 30%

Length of the base should be at least seven weeks

Length of the base should be at least seven weeks

Length of the base should be at least five weeks

Handle must form in the upper half

Pattern resembles a ‘W’

Volume dry up/shakeout

Volume decrease in handle

Second leg of the ‘W’ must undercut the first

Price range during base less than 15%

Breakout (50% > volume surge at buy point)

Breakout (50% > volume surge at buy point)

Breakout (50% > volume surge at buy point)

 

What do you think? Please email us any questions or comments.

Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.

One Reply to “Learning Article : How To Trade Stocks: What Is A Base? And How To Use Stock Charts To Win Big”

  1. Thanks a lot for writing such wonderful blogs. Providing great perspectives on investing. You are true to your name- Market Smith.

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