Measured Move: A Comprehensive Guide

Measured Move: A Comprehensive Guide

Definition:

Imagine you're watching a bouncing ball. It goes up, down, up again, and you have a good idea of how high it will bounce next. A measured move in trading is similar; it's a way to estimate how far a price will move after a specific chart pattern or trend has formed. It's a method of forecasting future price movements based on the size of previous moves.

Key Takeaway:

A measured move allows traders to predict the magnitude of a price movement, often based on the size of a prior similar move within a chart pattern or trend.

Mechanics:

At its core, the measured move relies on the principle of symmetry. It assumes that certain price patterns, once completed, will be followed by a move of a similar magnitude to a preceding move. This is most commonly applied to patterns like triangles, flags, and channels. Here’s a breakdown of how it works:

1. Identify the Pattern: The first step is to recognize a chart pattern. This could be a consolidation pattern like a triangle, a continuation pattern like a flag or pennant, or even a trend that is showing signs of a potential reversal.

2. Measure the Initial Move (Leg 1): Identify the initial price movement that forms the basis of your measurement. In a triangle pattern, this might be the distance between the start and end of the first significant price swing before the pattern begins to form.

3. Project the Move (Leg 2): After the pattern completes, project the length of the initial move from the point of the pattern’s breakout or breakdown. This projection is your target for the measured move.

   Example: If a stock forms a bullish flag, and the pole (the initial move) is $10, then you would project a $10 move upward from the flag's breakout point.

4. Refine with Support and Resistance: While the measured move provides a target, it's crucial to consider other technical indicators and levels of support and resistance. These levels can act as potential turning points and can help refine your target. If the measured move target coincides with a strong resistance level, it strengthens the likelihood of the price reaching that target.

5. Utilize Fibonacci Retracement (Optional): Many traders combine measured moves with Fibonacci retracement levels to further refine potential targets. Fibonacci retracement levels can often act as support and resistance, increasing the probability of a price reversal or consolidation at these points.

Trading Relevance:

Understanding measured moves is crucial for several reasons:

• Profit Targets: Measured moves provide objective profit targets. Knowing where a price is likely to move to helps traders set realistic profit targets and manage risk effectively.
• Risk Management: By anticipating potential price movements, traders can set stop-loss orders and manage their positions more effectively. For example, if you anticipate a $10 move, you might set your stop-loss just below the breakout point of the pattern.
• Entry and Exit Strategies: Measured moves can inform both entry and exit strategies. Traders might enter a position when a pattern completes and the price breaks out, anticipating the measured move. They can exit the position when the price reaches or approaches the target.

How does price move? Price movement is driven by the balance of buying and selling pressure. When buying pressure exceeds selling pressure, prices rise. When selling pressure is greater, prices fall. Measured moves help to anticipate where this pressure might shift based on the completion of chart patterns and the potential for a continuation or reversal of the trend.

Risks:

While measured moves can be valuable, they are not foolproof. Several risks are associated with their use:

• False Breakouts: Sometimes, a price will break out of a pattern, triggering a trade based on a measured move, only to reverse and move in the opposite direction. This is a common risk in trading.
• Inaccurate Measurement: The accuracy of a measured move depends on the correct identification of the pattern and the measurement of the initial move. Errors in these areas can lead to inaccurate targets.
• Market Volatility: During periods of high volatility, price movements can be erratic and unpredictable, making measured moves less reliable.
• Confirmation is Key: Relying solely on a measured move can be dangerous. Always confirm your analysis with other technical indicators, fundamental analysis, and risk management strategies.

History/Examples:

Measured moves have been used by traders for decades. Though not attributable to one individual, the concept has evolved alongside the development of technical analysis. Early practitioners of technical analysis, such as Charles Dow and Ralph Nelson Elliott, implicitly used concepts that led to the development of measured moves. The idea of recurring patterns and predictable price behavior is central to their work.

• Bitcoin in 2017: During the 2017 bull run, Bitcoin frequently formed continuation patterns, like flags. Traders used measured moves to predict the potential upside after these patterns broke out. If a flag's pole was $1,000, traders would project a $1,000 move upward from the breakout.
• Stock Market Corrections: During market corrections, traders often look for measured moves in rebound rallies. If a stock falls significantly and then forms a bullish pattern, traders might use a measured move to predict the extent of the subsequent rally.
• Forex Trading: Measured moves are also commonly used in Forex trading. Currency pairs often form chart patterns, and traders use measured moves to identify potential profit targets.

In conclusion, the measured move is a fundamental concept in technical analysis that provides a structured framework for estimating future price movements. While not a guaranteed predictor of future price action, it is a valuable tool for traders seeking to improve their profit potential and manage risk more effectively. However, it's essential to remember that it is just one piece of the puzzle and should be used in conjunction with other technical tools and sound risk management practices.