Virtually every stop-and-reverse breakout-based trading strategy can be described with just two parameters. The first is a “baseline” price that represents the best estimate of the current equilibrium price, around which price should (theoretically) fluctuate. The second parameter is a volatility or momentum-based amount that is added to or subtracted from the baseline price to indicate the next entry price, under the assumption that if price surpasses this level the market is about to make a significant shift away from the current equilibrium price — that is, make a trend or momentum move.

Although the term “baseline” might sound unfamiliar, almost every trader knows the most common of all baseline calculations — the moving average. This article will look at some old and new baseline calculations, and what their relative positioning implies about the nature of the most recent price action.