Our swing trading approach is centered around 1) buying breakout/support and 2) shorting breakdown/resistance.
The two methods are the inverse of each other — in buying breakout we buy the break of the base (our base and break method) or a dip to an ascending EMA (or SMA on daily), and in buying support we buy the reversal on an extended move away from the base.
The base is your friend when buying a breakout through resistance or shorting a breakdown through support. However, when doing the opposite — buying support, selling resistance– then you want to logically also be doing the inverse, buying the reversal on the extended spike down to support away from the base or selling resistance on a vertical spike up away from the base.
1. A textbook breakout of resistance from a base. The stock trades up to 110 resistance, builds a long base around 110 and breaks above it with heavy volume. The buy point in this case is anywhere in the base or right after it breaks 110, say 110.2. Stop level: 100 if you buy within the base, or 110 if you buy after the breakout.
2. A textbook breakdown of support from a base. The stock trades down to 90 support, builds a long base around 90 and breaks below it with heavy volume. The sell point in this case is anywhere in the base or right after it breaks 90, say 89.8. Stop level: 100 if you short within the base, or 90 if you short after the breakdown.
3a. When to buy or pass. The stock broke down from base at 90 and traded down to support at 80. Instead of bouncing, the stock starts to build a secondary base at support. Bad news for longs and you should exit the stock and look for the next support because there is a high chance the stock will go lower.
3b. The stock broke the secondary base and traded down to next support at 70. It then bounced off 70 and started to trade higher. Good news for longs and entry point is anywhere between 70 to say 73, with stop loss at 70.
4. IMPORTANT. If the stock starts building a base at either support or resistance. There is a good chance the stock will either break out of resistance or break down through support.
Base is your friend when you are buying breakouts through resistance/shorting breakdowns through support.
Base is your enemy when you are buying support/shorting resistance.