- December 15, 2020
- Posted by: CoachShane
- Category: Trading Article
One of my favorite chart patterns that gets ignored is the measured move. It is a versatile piece of price action that can be used for:
- Finding price target projections for the current price move
- A reversal pattern when price comes into a support or resistance zone
- Buying the dip or selling the rally
Trading the measured move is a great addition to your trading plan even if used to just measure the character of the market.
What Is A Measured Move In Trading
The measured move is a three wave pattern of price where the third wave is close to the same distance as the first wave in the pattern.
You may have seen it called either the “ABC” pattern or “A-B=C-D” which are both proper descriptions of what you will see price do.
You’ve all seen this price pattern:
- Impulse move to the upside
- Corrective decline
- Price bottoms out and begins to reverse
- The end of the measured move – 1-2=3-4
It’s a simple price pattern that easily resembles a price channel because it will often move in symmetrical sequence.
Why Does The Measured Move Work?
From a psychological perspective, if the move from 1-2 is done with momentum, what is a trader expecting?
It’s a strong move and traders will be expecting the same magnitude when price finishes the reversal.
Traders that wait for pullbacks to trade, will generally look for a strong momentum move prior to the correction. Price pulls make and traders that trade a retrace in price, will look to get long on a bullish move.
One thing that a trader will monitor is the depth of the pullback. You can pull out your Fibonacci retracement tools and measure from specific price points or keep it simple by eyeballing the pullback.
- Price pulls back 30-50% of the prior move up, there is some selling interest but not enough to drive price too far
- Deeper pullbacks may show lack of interest to the upside. In those cases, looking at the swing high is a viable approach
There is no need to get all mythic about the measured move. It is just driven by expectations.
How To Use The Measured Move Price Objective
I look at using the measured move pattern in two separate ways:
- Using it for price targets for both bullish and bearish positions
- Looking at the second leg as a resolution of a pullback (think corrective or 2 legged pullback)
We use the 100% of the first leg as a guideline. Price can overshoot or slightly miss that target.
Let’s look at…
Measured Moves For Profit Targets
Imagine you have decided to short on a pullback on this chart. Price has moved down as indicated by the two green circles.
Price pulls back into an objective zone of potential resistance and you take a short position at #1.
You measure the distance between the two circles and project that distance from #1 giving you a potential price target.
Price heads down, ranges for weeks, pops at #2 completing the second leg of the move equal to the first.
Let’s see a day trading time frame of a stock chart.
Price gapped up and began to retrace to fill the gap. Price doesn’t put up much fight to get to the upside:
- Price ranged and then poked up to a former area of resistance
- You measure from this location to the pivot low and project from the high at 1 (note the failure test setup at this location)
- Price, with momentum, falls to your measured move price objective 4% lower than the high at 1
I am going to leave this five minute chart of crude oil from Dec 14, right here. A picture perfect example of our measured move pattern.
Measured Moves With Pullbacks – Continuation Pattern
This is a great technique where you can avoid taking one legged pullbacks (simple corrections), getting stopped out, and then seeing price go in your direction.
Looking at the crude oil chart that is in a bullish trend, price is in a trading range and is missing criteria for a breakout trade:
- There is no basing under resistance
- There is no strong rejection of support
- No sequence of higher lows into resistance
Then, we get a break to the downside.
I measured from the first green circle to the bottom green circle and projected that distance from the last green circle. A-B=C-D.
Price ticked to the zone and took off to the upside.
Let’s take a look at Natural Gas CFD.
Price opened strong off the open and began to consolidate and making lower highs into support.
We want to go long due to the strong momentum but we need a place to enter. Drawing our measured move gives us an indication of where this consolidation may end.
Price drops right to 100% of the A-B distance and begins to bounce.
You can also apply a price channel for a technical analysis confirmation if that is important to you.
The initial trend is bullish and price begins to retrace. Many traders buy in on the first move up and the price breaks back to the downside.
We find price being supported in the area of the measured move and the bottom line of the price channel.
Trading Rules You Can Use
What you have learned was that the measured move can not only give you potential price targets, but also zones to look for the ending of a pullback.
- Consider setting your profit target price when you set your entry order. This is more of a set and forget approach
- Once the measured move completes, see if you can get a reversal trade if near prior swing highs or lows
- When trading pullbacks, by only looking to trade once the measured move completes, can help avoid losing trades from simple corrections.
- You must use an entry trigger and not just limit buy at the measured move projection
- Look left at the price projection zone to see if there is support, resistance, or swings levels
Trading the measured move is one of my favorite approaches to the market that I personally use on every chart.
Consider adding this method to your current trading strategy and see if it improves your results.