A measured move or also known as the ABCD pattern to some traders is a technical concept that helps the trader to set targets. It can also be used to help traders get an idea of the duration and length of a move. We do this by taking the height and length of the previous move and project it upwards from the current move.
The measured move is a favorite of mine because it helps me to gauge the reward to risk and set a possible target to take profits off the table. Once you have learned it, you will also realize how powerful this simple concept can be.
The diagram above shows how a bullish measured move looks like. Measured moves can be used to project a target for bullish moves or bearish moves. Therefore, they are very useful for both long and short positions.
There are a few components to the bullish measured move:
The moment that the trader suspects that a higher low is formed at C, he or she can use the wave from A to B as a guide.
Height From A to B as Target
Take the height of the move from A to B and then project it from C to get a measured move target. Stocks can often stop rising the moment the target is met. I have seen this phenomenon countless times and therefore I will take some profits off the table.
It is always a good idea to take at least 1/2 of your positions off the table if you see a measured move target being met. You can then slowly monitor if the stock can continue the uptrend higher. If there is resistance at the measured move target, its always best to take all your position off the table.
Duration of A to B as Time Measurement
You can also check the duration that it takes for the stock to move from A to B to get an idea how long it takes for the stock to move from C to D. Let's say the stock takes about 2 weeks to move from A to B. You should also expect the stock to take almost the same amount of time to move from C to D.
Knowing the duration can give you confidence in holding on to a stock. If the duration from A to B takes 2 weeks, then you should not give up on the stock after holding it for only 3 days. On the other hand, if the stock takes more than 2 weeks and it hasn't reach the target, that will give you a warning sign that something is not right.
Slope of the rise from A to B
The 3rd thing you can use from the measured move is the slope that the stock makes when it goes from A to B. Many times, the measured move will make a 45 degrees bullish angle. You can also expect the stock to move in that angle when it goes from C to D.
It is always important to remember that the measured move is just a guide to help us anticipate what might happen. Do not take it that the stock will behave 100% the same way as it did in the past.
The bearish measured move works the same way as the bullish measured move. The principles are the same, but we use it to project a target to the downside.
Here are the components of a bearish measured move:
The moment that the trader suspects that the stock is forming a "C", he or she can use the height of A to B and project it downwards from C to get a target.
The principles with regards to Height, Duration and Slope are the same for bullish measured move and the bearish measured move. Just reverse it for bearish.
Now that we have learnt the theory, it is important for us to look at some real live examples. Its good to have some fancy diagrams showing you the technical concepts but the best is still to have some real charts that show you the theory in action.
The chart above is the 60 min chart of AMZN. Do remember that the measured move pattern can appear in any time frame. So don't be surprised to see an example in the 60 min chart. Usually you will find examples from a daily chart because that is what most new traders will be familiar with.
I have labeled the chart with A,B,C and D so that you can see the different parts of the measured move.
The stock moved up from A to B and then it had a correction. The stock formed a low at C and then had another move up to D to complete the whole measured move pattern. Some of you will realize that this is actually a 60 min breakout.
Notice how the measured move gave a very nice target for traders. After the target is met, the stock corrected for a bit. You will of course notice that the stock continued to move a bit higher.
Just remember that a measured move target is just a target. There are times that the stock may continue to go higher. Traders who use this measured move can sell 1/3 or 1/2 of the stock and then closely monitor and see if the stock can continue the uptrend.
Now let's take an example from the daily chart.
The chart above is the daily chart of Citigroup. This time I did not label the ABCD's but as you can see, its pretty easy for you to recognize the measured move. The stock rose around the beginning of June 2017 and then it corrected. Towards the end of June 2017, Citigroup had a move up.
Traders can take the height of the previous move and then project it upwards from the second move up to get a target. This time, Citigroup gave a textbook version of a measured move target. Once the target is met, it quickly declined.
Now let me show you a unique situation where the stock has two measured move.
The chart above is the 60 min chart of MCHP. There are 2 measured moves in this example. The first one is a bigger measured move and the second is a smaller one. What I call a mini measured move.
The first A to B move upwards happened from 22nd of August 2017 to 5th of September 2017. The stock then corrected and just one day later, the correction ended and it continued to move higher. Notice how the move from A to B gave a nice measured move target for the stock.
After coming close to the measured move target, the stock declined from there.
The second measured move, which is the smaller one is the blue lines that I have drawn on the chart. The A to B upwards move occurred from 6th to 12th of September 2017. The stock consolidated after that and then broke out to form the move from C to D.
Notice how the move from A to B provided a nice measured move target for the breakout. The stock immediately corrected at the measured move target was met.
We have seen a few examples of a bullish measured move. Not let's take a look at an example of a bearish measured move.
The chart above shows the daily chart of COP. I have labelled the measured moves ABCD. The stock had a correction from A to B and then it rallied back up to C. From there it dropped from C to D. The measured move target that we take from A to B gave a very accurate target for the move from C to D.
The stock met the measured move target and then it bounced back up furiously. Traders who were short this stock for a swing trade can often close out their position when the measured move target is met.
The measured move or the ABCD pattern is a very simple but useful tool to add in you technical analysis arsenal. I have been using it for quite some time and have found them to be very useful to my trading. While the measured move target may not always be met or the stock may even exceed the target, it helps to give traders a realistic view of how far a stock can move. Learn it properly and also train your eyes to spot them and you will gain another powerful tool to help you in your trading.
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