What is Basing?

Basing is a chart pattern used in technical analysis that shows when demand and supply of a product are almost equal.

It results in a narrow trading range and the merging of support and resistance levels.

Basing Trading Strategies

Trend Continuation: Traders using a basing period to find an entry point in a trending market should place a trade when the price breaks above the high of the close range (for a long position). The breakout should occur on above-average volume to show participation in the move. Ideally, a commonly used moving average, such as the 20-day or 50-day, acts as support at the bottom of the basing period; this allows the moving average to catch up to the price. The moving average acts as resistance for a short position.

The narrow range of abasing formation allows for a healthy risk/reward ratio. Traders can place a stop-loss order below the lowest traded price in the basing period. Since the expectation is for the market to start trending again, profit targets that are many multiples of the stop amount can be set to capture the bulk of the move.

Trend Reversal: Contrarian traders may use a basing period to find potential bottoms or tops in security. Suppose a market has been consolidating for an extended time. In that case, a breakout in the opposite direction to the previous trend often triggers stop-loss orders and attracts traders leading to an environment conducive to a reversal. As with the trend continuation strategy, the trade should be exited if the price breaches the lowest traded price during the basing period. Traders could use retracements of the previous trend to set profit targets.