Gaining Perspective with Measured Price Moves

RichardCox · November 4, 2013

Gaining Perspective with Measured Price Moves

Since the term “measured price move” can be applied in multiple contexts, it makes sense to examine its basic definition so that newer traders are not confused when the discussion topic arises. At its core, a measured move offers technical analysts an aid in forecasting future price moves after a clearly defined chart move has been idnetified. For example, a “chart move” can include things like the completion of a price pattern or a impulse wave in a trend. Let’s use an ascending triangle as our charted example (see the first attached graphic). Typically, when an ascending triangle (a continuation pattern) is seen, prices are expected to continue travelling in a bullish direction once the pattern’s resistance area is broken.

The chart example shows prices violating resistance and continuing to the profit objective for long positions. But how is this level determined? And how to we know how many pips away from entry to place are take-profit orders? The answer lies in the measured move that precedes the break of resistance. Figure 2 shows a more detailed example with successive ascending triangles and the “pole” that represents the price distance in the initial impulse move. If this price distance equals 150 pips, the profit target will then rest 150 pips above the breakout point at the flag resistance line. In short, the size of the initial pattern is proportional to the size of the move that is expected to follow.

History Repeating Itself

The logic behind these theories is similar to what supports technical analysis as a whole: The idea that market activity is predictable as history tends to repeat itself. In addition to this, measured moves often correspond to a larger trend, where the market’s momentum is expected to re-assert itself with characteristics that exhibit relative equilibrium. Consider Figure 3 where prices have formed an uptrend channel beginning at point A. Once resistance is hit at point B, prices retrace (correct) some percentage of the move AB before reversing at point C and resuming the uptrend to point D. Note the similarities in structure, angle and distance in lines AB and CD.

Gaps

In other cases, potential price moves can be measured and projected when gaps in market valuations are seen. These events occur when, for example, markets are highly illiquid or when a significant news event changes the underlying bias that was previously in place. There are not enough active buyers or sellers to ensure stable price progression, so markets gap above or below to reach an area where there are enough buyers or sellers to contain prices. Figure 4 shows a bearish price gap. In these cases, the market’s perception of the value of the asset is being altered. To measure the next projected move from the price gap in an uptrend, we must find the price distance from the trend low to the middle of the upward price gap. This height is then projected to the upside, as shown in the structures in Figure 5.

Watching Price and Time

But while measured moves are typically thought of as simple movements in price, there are important time considerations that should be factored into the equation as well. The reason time is often overlooked here is because traders tend to be focused entirely on profits and losses once positions are open. But there is more to market activity than simple price action. Time scenarios have a tendency to repeat themselves as well, and this phenomenon can be extremely useful when looking to identify trading setups. So, when we are measuring projections within a trend move, it is important to note not only the number of pips prices have traveled but the amount of time it took markets to reach the measured level. This is done most easily using the similar trajectory angle on a single time frame.

In Figure 6, we can see that the USD/CAD is showing positive trend momentum, with upswings of 410-470 pips in 15 and 16 day time intervals. So, while the relationships here are not exact, there are some striking similarities that should be noted. Of course, prices cannot travel in a bullish trend for an indefinate period, and markets will always need periods of reverse correction. This follows in the same chart, with prices falling 365 and 380 pips over 18 and 19 day periods. At this stage, we can start to see some of the characteristics that mark the uptrend in USD/CAD. Once prices start to turn up again, we will then have some idea of how far prices are likely to extend. When making our projections for the next measured move, then suggestion here is that prices are likely to travel somewhere in the neighborhood of 440 pips over the next 15 days.

Constructing an Uptrend Channel Projection

In Figure 7, we can see another example of an uptrend in the S&P 500. For those with technical analysis experience, this structure might look familiar as an uptrend channel, as prices continue to post higher lows and higher highs. First we will focus on the upswings, as this is where the majority of the market’s momentum is centered. In the first two impulse moves, we can see that prices have traveled 150 points in 22 and 24 days. This was followed by an incongruous move of 109 points over 16 days. So, when prices hit uptrend channel support, it would not be a prudent idea to set profit targets a full 150 points away, as there is now evidence of slowing momentum. Instead, traders would look for an average of these moves, and look for a profit zone that is approximately 130 points from the next swing low.

In Figure 8, we can see a more complete uptrend channel composed of measured moves. Using the GBP/USD, prices start with positive impulse moves of 620-695 points over 12 and 13 day periods. Downside corrections within the uptrend channel are smaller in length and shorter in time. This would have to be the case, by definition, given that an uptrend channel will require the majority of the price action to be bullish. Bearish sub-moves (corrections) are seen in 5-6 day intervals with pip moves of between 290 and 330 pips. In this case, there are some warning signals that the uptrend channel might be over, as there is a double top formation. But, without this (or if prices break above this double top), the measured move would be something in the region of 660 pips over a 12 day period. This target should also fall roughly in line with the channel resistance zone.

Conclusion: Measured Moves can be Used as an Aid in Setting Profit Targets

Measured moves can be a valuable tool for traders in determining the likely extensions of major trending moves in the market. Trends are characterized by extreme changes in momentum, and in these cases it can be difficult to know when or where (price level) those a trend is going to run its course. If we do not know when a trend will complete, it is nearly impossible to set a profit target that can capture the majority of the action. Measured moves help to resolve these issues. In all cases, it is important to watch the elements of price as well as time, as these factors work in conjunction with one another and can help you to gain a more accurate reading of when and where a major turning point will be seen.