Most retail participants feel that the markets represent boundless opportunities for financial gain. Some find it, but most don't. When it comes to the markets things can be confusing at times because once a trader finds a trend, sometimes it seems as if it's over in the next tick.
However, the market does provide a simple way to help traders gauge and set their own expectations, thereby increasing the odds of a favorable trade. This process helps the trader understand how to better identify and manage risk as well as reward allowing the trader to approach the market in a more confident manner. Of course there is never a guarantee of quick and infinite profits but there is a simple way to analyze a security to see what it has done, versus what the trader thinks it will do; it's called the Measured Move.
A Measured Move is simply that, measuring the various up and down swings on a chart of an equity, currency pair, futures or commodities contract. By performing this exercise on the preferred time frame, a trader will not only begin to understand how far in price a security might move, but also how long those moves typically last based simply on market history.
To begin this exercise a trader must first determine the primary, or larger, trend relative to the time frame they are trading (see my Trend Relativity Study Hall for more details). For instance, if a trader was interested in trading the specific opportunities on a daily chart it would be in their best interest to review the trend of the weekly chart to identify the primary trend as well as significant support and resistance levels that could impact the results of any trades taken based on patterns on the daily chart.
The second step is essentially studying all of the impulse (or expansion) and corrective (or contraction) phases in the relative time frame. For example, on the daily chart the trader would measure the difference between the "relative major" swing lows and swing highs as the security has ebbed and flowed back and forth in the various trends present on the daily chart. It is the results of these differences that the trader will be able to apply to the current swing to determine how far, or how evolved, the current trading opportunity is relative to prior swings.
In addition to the point difference it is also prudent for the trader to review the percentage difference to understand how the security may move on a logarithmic scale versus a linear scale, especially if the security in question is at a low price or it is a high growth stock. In addition to the price, or percentage difference, it would also benefit the trader to understand the average duration of time between the swing high and swing low.
This information is especially critical to options traders who are subject to time decay in the value of the investment vehicle. However, this information is just as valuable to the trader investing directly in an equity, currency, or futures contract. The combination of the price or percentage difference and the time it has taken to move in the past becomes valuable information for future trades as patterns tend to repeat themselves in price as well as time.
To illustrate the concept of the Measured Move, a daily chart (Figure 1.1) shows the Great British Pound vs. the USD (GBP/USD). The major swing highs and swing lows, as well as some minor (minor swing high or low describes pivots within the range of major swing highs and swing lows), have been labeled in alphabetic order, beginning with the low marked "A" representing the low on April 22, 2009 at 1.4396 through the low marked "Q" representing the current low as of March 1, 2010 at 1.4776.
Figure 1.1
These points on the chart were identified by asking two simple questions, "At what point did the market stop going up, and when did it start going down?" and "At what point did the market stop going down and start going up?"
Figure 1.2 is the same chart of the GBP/USD; however, it now includes blue lines that highlight the difference between the peaks and troughs, or swing highs and swing lows.
Figure 1.2
The vertical lines represent the rise or decline in value of the GBP/USD, and the horizontal lines represent the amount of time to complete a swing from the low to high or high to low.
The red lines in Figure 1.3 below represent copies of the blue lines measuring price and time, simply placed in order to determine what the range in price and time has been during the period analyzed. In this analysis it was found that the major Measured Moves in the GBP/USD last 15-33 days, and the minor Measured Moves typically last 7-9 days with the exception of two. As for the amplitude of the Measured Moves it was found that the GBP/USD has moved as much as 2,272 PIPs in a major swing to as little as 285 PIPs in a minor swing, with most swings averaging 891 PIPs. Please note that a key aspect to this form of analysis is proportion and symmetry (relate larger swings and minor swings to one another).
Figure 1.3
As stated in the beginning, traders must compare recent trading activity to the historical trading activity to determine how much opportunity, if any, remains in a trade, or possibly if a trade could be setting up.
With the current phase being swing P-Q, the trader should look at the previous swings such as F-I, N-O, L-M, (all moves in the current direction) and subtract the differences from those last three swings from point P to identify a price objective for what will become point Q. The values come to 1335 PIPs for swing F-I, 1044 PIPs for swing L-M and 923 PIPs for swing N-O. Subtracting these values from point P provides Measured Move targets of 1.4476, 1.4771, and 1.4889, respectively.
Another Measured Move to note would be the A-B swing subtracted from point F; doing so provides a Measured Move target of 1.4777. Note how two of these Measured Move objectives coincide with one another, 1.4777 and 1.4771. At the time this article was written the GBP/USD had sold off overnight, and has hit an intraday session low of 1.4776, and has risen from this level.
With the possible completion of this Measured Move in price the odds that would favor taking the GBP/USD short have severely diminished, and could be in the process of favoring a trend reversal, or at least a corrective Measured Move of approximately 285 PIPs to 1000 PIPs, corresponding to other corrective Measured Moves found at points G-H, I-J, K-L, M-N, and O-P.
In addition to the Measured Move analysis using price showing a potential completion.... time is showing that the current move is reaching maturity. Measured Move analysis of time shows that the current decline from point P may conclude within the next 1-4 trading days, to as long as 14 trading days.
Although only the GBP/USD was analyzed, the process is similar for all securities, and hopefully this article has demonstrated that it is worth the time and effort of studying price and time history which results in the Measured Move. This data, when considered in a trade plan, should allow the trader the opportunity to better understand what the potential Measured Move is of a particular security not only during impulse phases, but also corrective phases which ultimately allows the trader to build proper position size, enter, manage, and exit trades at the appropriate time.
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