If a trader has spent a few years in the market and has been continuously observing the charts of many stocks, they must have come across some stocks that have given a sudden and big move right after trading within a confined range. They must have also come across stocks which seem to be moving slowly and not giving any moves for a few days and then give a strong move in the next few sessions. There are stocks which are currently forming a consolidation pattern and then see a strong move after the breakout. In such cases, the trader usually doesn’t know how to participate in the stock because the move is fast, and the entry is difficult.

This was a mystery to me as well. But then, something came to my notice. Just before a breakout, there is a certain formation in price that could increase the probability of a strong breakout. I call this formation as Buildup. In today’s newsletter, we decode this formation and understand how one can participate in this formation. We will also see what kind of stocks form this buildup. Bullish breakouts are discussed in this newsletter.

Build up: It is all about demand and supply

The logic of buildup lies in understanding the demand and supply equation in the market. When we analyze the charts, we are essentially looking for demand and supply signs on the charts. The patterns, indicators, and trendlines all inform us about the demand and supply for an instrument. In the complexity of analysis, which traders usually think works, traders forget that everything boils down to demand and supply.

Buildup shows demand and supply very beautifully. Buildup is a price formation that takes place just before the breakout of price. The formation is such that the price trades within a small, confined range just before breaking out. The candles in this formation usually form right beside each other.

These buildups can be seen in 3 kinds of stocks:

1. The ones trading near All Time High

2. The ones trading near 52-week high

3. The ones where the price is forming a consolidation or Volume contraction pattern.

When the buildup forms, it shows that the high of this range is facing strong supply. But the twist is that the low of the range is also facing a strong demand. This play of demand and supply form buildup and makes the price move sideways within a few candles. This build up can be thought of as the narrow range 7 or narrow range 4 concept.

How to trade buildup?

Trading Buildup can be very tricky because the price can move very fast. There are also chances of price opening with a Gap Up after breakout. So how does a trader participate in these stocks?

The solution to this is to shift the timeframe lower and participate then. For example, if the price is forming a buildup on Daily TF, the timeframe can be changed to 15-min TF and a MSL can be used as an entry trigger. The trader can also use Anchor patterns on PnF 0.25% 1-min TF to enter the trade. On Renko charts, One-back and Two-back patterns can be used for entry with a small stop loss.

The best part is this build up forms on Weekly TF and Monthly TF as well. Then the timeframe can be shifted to a lower TF such as Daily or Weekly respectively.

Observe the chart below. The FINBACLES chart was trading near ATH price. The price formed a buildup on weekly timeframe and later saw a strong move after breakout. The Buildup was in formation for a few weeks.

The chart below if of COLPAL. The price formed a Buildup for a few days and later broke the range with a gap.

The chart below shows the price forming a buildup on weekly TF. The chart also shows RS Alpha indicator plotted below the chart. This shows that the concept of build can be used in combination with other indicators.