The three-part structure
Kullamägi describes leading stocks as moving in stair steps: a powerful advance, a period of rest, and another potential advance. The pause is where supply and demand become visible. Loose, volatile action suggests distribution; narrowing ranges and higher lows suggest that sellers are becoming less aggressive.
A meaningful prior move
His original guide uses a rough 30-100% or greater advance during the previous one to three months, lasting from several days to several weeks.
An orderly consolidation
The stock pulls back or moves sideways for roughly two weeks to two months. Range tightens, higher lows may form, and price often stays near rising 10-day and 20-day moving averages.
Range expansion
The trigger is not the quiet base itself. Price must leave the consolidation with decisive action that shows demand has returned.
Finding candidates
The search begins with strength. Kullamägi has described scanning for the small percentage of stocks with the best one-month, three-month and six-month performance. That creates a list of current leaders rather than stocks that merely look inexpensive.
Once leaders are identified, the daily chart is used to find constructive pauses. Relative strength, strong sector action and earnings or sales growth may add context, but price behavior remains the primary filter.
Questions for the watchlist
- Was the prior move large and persistent enough to demonstrate real demand?
- Is the consolidation orderly, or are wide reversals showing unstable sponsorship?
- Are the 10-day and 20-day moving averages rising beneath price?
- Is the stock near the top of its range rather than repeatedly rejected from it?
- Is the broader market supporting momentum, or are most breakouts failing?
From watchlist to entry
His public material commonly uses an opening-range high after the stock begins to break from the daily base. The reference can be the high of the first one-minute, five-minute or longer opening candle. This waits for intraday confirmation rather than assuming the daily breakout will hold.
The initial invalidation is generally the low of the day. He also states that the stop distance should not be wider than roughly one Average Daily Range or Average True Range. If the entry is too far above the low, the trade may no longer offer the intended reward relative to risk.
- Build the watchlist before the market opens.
- Know the daily breakout level and calculate possible share size.
- Observe the opening range instead of chasing the first print.
- Enter only when the selected opening-range high and daily structure confirm.
- Place the stop at the predefined invalidation and accept the loss if it fails.
Managing a successful breakout
In the original setup article, Kullamägi describes selling one-third to one-half after roughly three to five days, moving the stop toward break-even, and trailing the remainder with the 10-day or 20-day moving average depending on the speed of the stock. This is a description of his historical process, not a universal prescription.
The purpose of partial profit taking is to reduce exposure while retaining participation if the leader produces a much larger swing. The cost is that a trader may reduce a position before its largest advance. Any rule should be tested consistently rather than changed to fit the latest chart.
What weak versions look like
- The prior move is small or occurred too long ago to represent current leadership.
- The base is wide and erratic, with repeated heavy-volume selling.
- The stock breaks out after already becoming far extended from its moving averages.
- The breakout opens too far above the base, creating an unreasonably wide stop.
- Volume and price expansion are absent, or the stock immediately falls back into the range.
- The overall market is hostile to growth and recent leaders are losing support.
A failed breakout is not evidence that the whole pattern has stopped working. It is one outcome in a setup with a meaningful failure rate. The practical question is whether the loss matched the plan and whether the example belonged in the setup sample at all.
The required study
Collect both clean and failed examples. For each, mark the size and duration of the prior move, depth and duration of the base, behavior around moving averages, breakout volume, opening range, initial risk and maximum follow-through. Compare examples across strong and weak markets.
The goal is not to draw the perfect triangle after the fact. It is to recognize, in real time, when a current leader is behaving like the strongest historical cases and when it is only vaguely similar.