Patience truly is a virtue.
It’s one of the most important lessons a trader can learn.
Rushing into or out of trades based on a knee-jerk reaction can have devastating consequences.
When I was first starting as trader, I never wanted to show up late to the proverbial party.
The thought of getting into a trade too late and leaving money on the table was unbearable. Of course, often I’d pull the trigger far too early and I was left figuring out how to carry around a losing position.
And when the loss became too much, I’d get out of my position… and then watch the price action over the next few days do precisely what I thought it would do in the first place.
I’m sure this has happened to you at least once before. If it has, then you know it’s an incredibly frustrating experience.
Fortunately, I have a fix for this cardinal sin of trading…
You see, I was so quick to pull the trigger in the first place because I didn’t know what I was aiming at. Everything looked like a target.
When I took a step back and thought about what a high-confidence trade setup looked like, I realized I didn’t have an answer.
So, I invested the time to develop a few go-to setups that I could regularly look for on my price charts.
I had some criteria for these setups… First, they had to have a strong probability of working out. But, more importantly, they had to offer excellent risk-to-reward opportunities.
A good setup meant having the chance to double or triple my money – not just earn me $1 when I was risking $1.
One of those setups I came up with is called a “high base,” and one is taking shape in Berkshire Hathaway (BRK.B) right now.
A high base has three key features:
First, it needs to take shape after a strong run in the stock.
Then, we need to see sideways price action trading in a tight range.
Finally, we need to see a strong breakout out of the upper boundary of the high base.
If all three criteria are met, then we have a high-probability trade setup on our hands.
Finally, what makes a high base such a compelling trade setup is that the ensuing breakout tends to be quite strong.
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If the range of a high base spans about $10, then it’s not uncommon at all for the breakout to travel $30 or $40. This gives us a great risk-to-reward opportunity on these kinds of trades.
Now, let’s look at the high base I see forming on BRK.B’s price chart. Please note that I have used blue trend lines to trace out the high base…
Let’s see if BRK.B meets my criteria for a valid high base:
Is there a strong trend? We have a strong uptrend in this stock. From its March 2020 lows of $162.13 to its June 2021 high of $292.52, BRK.B rallied 80%.
Have prices traded sideways and in a tight range? Prices have traded between the $292.52 June high and $272.94, the lowest point in the range so far. The range is a tight $19.58, or 6.7%. Therefore, we can consider this criterion met as well.
Do we have a breakout of the upper trend line of the high base? If, on a daily timeframe, prices can break and close above the June high of $292.52, then we can consider the high base to be complete, and we would have an actionable trade setup on our hands.
This is where patience comes into play. A younger, less experienced version of myself would be sizing up a big position to go long right this instant.
Trigger discipline is important. Waiting for confirming price action is a great way of making sure that what you’re aiming at is a target worth trying to hit.
It will be worth the wait to see if this high base ends up breaking out to the upside. If it does, then you can consider taking a long trade in BRK.B.
If it doesn’t, then you’ll have saved yourself from sitting in a losing position and hoping you’ll at least break even.
For now, keep your powder dry. And, when the target becomes so big that it’s harder to miss than to hit, that’s when it’s time to pull the trigger on the trade.
Analyst, Market Minute
In today’s mailbag, Jeff Clark Trader member Mary expresses her gratitude about the “crystal ball.”
Thank you for letting us know about the VIX “crystal ball!”
– Mary L.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].