Measured Moves: Simple, Powerful and Profitable Trading Tools (Part 3)
05/07/2008 12:00 am EST
Note that in part 2 I have ‘stacked’ or drawn in zones that are of equal height, one on top of another. These stacked zones represent the concept of equal actions—in essence, price will eventually top out and when it does, it will likely top out at some multiple of the original trading range.
You can see I added an up sloping median line or pitchfork and its upper and lower parallels. Note that the upper median line parallel of the pitchfork and the third horizontal parallel line above the original trading range intersect at the area where price tops out. This is an area of confluence, and many types of measured moves can be combined to find areas of confluence.
These can be very powerful measuring techniques, yet they are simple enough that the Phoenicians, more than 4000 years ago, may have employed some of them in their own decision making when trading.
Let me show you another example:
This is a chart of Consolidated Energy, a stock traded in the United States. Price has been in a nice up trend but then it pulls back and violates the lower median line parallel. While there are high probability entry techniques to use after this type of precipitous drop, they are beyond the scope of this article and you can read about them in my books or on my web pages. In this article, we are concerned with measured moves, so we will assume the trader knows a way to get long once price makes the steep decline. The key again is how does this trader maximize profits once price begins to quickly climb out of the hole? Let me repeat the earlier phrase ‘That which is below is like that which is above’! Simply measure the amount price undershot the lower median line parallel and then project that same price distance above the median line or center line to get a high probability target area to take profits. As you can see, what worked for the ancient Phoenicians still works wonderfully well in today’s many markets.
More in part 4 tomorrow.