Although not a well-known trading chart pattern, the measured move pattern can tune up your understanding of the price chart and improve your analysis if you know how to spot the pattern. What is this pattern, and how do you use it in trading?
A measured move is a chart analysis concept that states that the market has the tendency to move in a similar way to the way it moved recently. For example, in a trending market, the next impulse price swing is expected to be roughly the same size as the one before it.
The measured move chart pattern is a three-part chart formation that begins as a reversal from a previous trend and completes as a continuation move in an emerging trend.
In this post, we take a look at the measured move chart pattern, and at the end of the article, we provide a backtest of the strategy.
What is a measured move?
A measured move is a chart analysis concept that states that the market has the tendency to move in a similar way to the way it moved recently. The similarity is not just in the price distance should be the same but also in the time needed to reproduce the same move should be almost the same. For example, in a trending market, the next impulse wave is expected to be roughly the same size as the one before it.
No special tools or charting platform is necessary to see the measured move on the chart. What matters is that the second impulse swing is equal to the first one. You can draw some lines on your chart to measure the moves. Before computer charting platforms, chartists would use rulers on printed charts to determine their measured moves.
This concept is mostly used by swing traders to estimate their profit target by assuming that the next price swing would be equal to the last one in the same direction. However, assuming that the future will resemble the past is a heavy assumption that can really hurt us when we’re wrong. The market doesn’t often move in the same way all the time, as many factors can affect the price action at any point in time.
What is a measured chart pattern?
The measured move chart pattern is a three-part chart formation that begins as a reversal from a previous trend and completes as a continuation move in an emerging trend. It consists of a reversal impulse wave, a correction/consolidation, and another impulse wave that is a continuation of the emerging trend.
The second impulse wave is roughly the same size as the first one. Since the measured move chart pattern cannot be properly identified until after the correction/consolidation period, it is categorized as a continuation pattern.
Here is how to identify the chart pattern:
- Previous trend: To have a measured move reversal, there has to be a prior trend, which can be a downtrend or an uptrend. The chart above showed that the previous trend was a downtrend (downward red arrow). In stocks, the length and severity of the prior decline may vary from a few weeks to many months.
- Reversal impulse swing: The first impulse swing, which is regarded as the reversal swing usually begins near the established lows of the previous decline and can last for an extended period. While this reversal pattern can mark the initial trend change, the new uptrend is established by new reaction highs or a break above resistance. Ideally, the advance is fairly orderly but can also exist with some mini swings within the general swing, as you can see in the chart above (first white arrow).
- Consolidation/correction: The reversal impulse wave is followed by a correction (downward yellow arrow in the chart above). This could also be some sort of consolidation such as a rectangle, ascending triangle, flag, or falling wedge. As a correction, there could be a 33% to 62% retracement of the previous advance. Generally speaking, the bigger the advance, the bigger the correction. A 100% advance may see a 62% correction and a 50% advance may see only a 33% correction.
- Continuation impulse swing: After the correction comes the continuation impulse wave (the second white arrow in the chart above), which is referred to as the measured move because it is about the size of the reversal impulse wave. It signifies the continuation of the emerging trend. This impulse swing is what swing traders try to capture when trading this pattern, and they can estimate their profit target by measuring the distance from the low to the high of the first advance (the reversal impulse wave).
There are some things to note when trading this pattern. Entry points can be identified using the normal breakout rules. That is, a breakout of a counter-trendline applied to the correction wave could be a reason to enter a trade in the direction of the emerging trend. This would be an aggressive early entry for traders who would like to take the risk of anticipating the continuation of the new trend. This method offers a good reward/risk ratio and the profit target is almost the size of the first move.
Another entry method would be to wait for a breakout of the swing high formed by the reversal impulse wave, which would serve as confirmation of a new uptrend (higher swing high and higher swing low). Although this method would make for a late entry, it ensures that the new trend is confirmed before entry. When using this method, the profit target must be measured from the low of the correction wave. Thus, the expected profit is much lower, and the reward/risk ratio may not be good enough.
Is a measured move bearish or bullish?
The measured move chart pattern can be bullish or bearish, depending on the prior trend before it occurs. If the preceding trend is a downtrend, the pattern would be bullish, as it signals the emergence of a bullish trend. You can see an example in the chart above. On the other hand, if the preceding trend is an uptrend, the pattern would be bearish, as it would signal the emergence of a bearish trend.
Measured Move Chart Pattern Strategy – backtest
Unfortunately, we are not able to make a meaningful backtest of the Butterfly harmonic pattern strategy. Any backtest requires strict trading rules and some additional settings, but because this is a very subjective pattern, we are not able to jot down what is needed. It’s simply too many rules that are needed.
Unfortunately, we are not able to make a meaningful backtest of the measured move pattern strategy. Any backtest requires strict trading rules and some additional settings, but because this is a very subjective pattern, we are not able to jot down what is needed. It’s simply too many rules that are needed for a historical test.
Because of the lack of objectivity, we believe traders are better off NOT trading on classical chart patterns. Why spend time on something that is mostly based on subjectivity and not any objective standards based on historical data? How do you know a pattern is profitable if you have not backtested it and found any statistical advantage and edge?
Backtesting and a data driven trading approach is no sure thing, but at least you have an idea that something has worked in the past – you have historical performance and performance statistics. If it has not worked in the past, you can skip it immediately. If you know how to backtest with historical data you can develop a portfolio of trading strategies pretty fast. There is no best trading strategy because you need many to smooth returns.
(If you are new to backtesting and statistical testing and it looks like a daunting task, you might be interested in our backtesting course.)