Measured moves in pattern FX trading is all about finding the price objectives of the breakout or breakdown move of price when a chart pattern resolves.
What are Measured Moves?
With regards to chart patterns, a measured move is a method of determining the price objective of a price breakout or breakdown move, following the resolution of a pattern. This is very useful in determining where profits can be taken off a trade that has been made to follow the breakout or breakdown of a pattern.
Chart patterns are of two varieties:
- Continuation patterns’
- Reversal Patterns
Irrespective of pattern type, it is essential that traders know where to set their Take Profit targets so that they are able to take profits at the right time. A Take Profit target that is set to far away, and price may not reach it before it starts reversing against the trade. Set too close, you may take less profits than you should have, thus leaving money on the table.
So it is not just enough to know that price will break out of a pattern in a certain way. You also have to know how far price will move when it breaks out of the pattern. This is what is known as the measured move, or the price objective.
How to Determine the Price Objectives from Various Patterns in FX
The pattern’s height is what is used to determine the price objective. This will involve some simple Mathematics. Here is how it is done.
- Measure the height of the pattern, that is, the distance of from the top to the bottom of the pattern in a vertical plane.
- Subtract the lower price from the higher price to get the number of pips that the height corresponds to.
- Once the breakout or breakdown has occurred, add this figure to the price at which the breakout has occurred to get the upper limit (breakout), or subtract this figure from the price at which the breakdown occurred to get the lower limit.
This gives the price objective for the breakout or breakdown moves from the chart patterns. Let us now take the various patterns one after the other to illustrate this.
Tops and Bottoms
Tops and bottoms refer to the double top/double bottom or triple top/triple bottom patterns. Both sets of patterns resolve in the same way.
- Double/triple Top
The double/triple tops are bearish reversal patterns. For the tops, price forms either a reaction low located between two price peaks in an uptrend (double top), or two reaction lows between three price peaks in an uptrend. A horizontal line is drawn across each reaction low, forming a neckline. Price breaks below the neckline to complete the patterns, and the price projection is obtained by measuring the distance between the highest peak and the neckline in a vertical plane, then subtracting the figure from the neckline’s price to form the price projection point below the pattern.
Double top showing vertical height
Distance between top (1.43069) and neckline (1.37145) = 592.4 pips (i.e. 0.05924 points)
Distance from neckline (1.37145) to the downside = 1.37145 – 0.05924 pips = 1.31221
Double top showing price projection/measured move
Therefore, a sell order that takes advantage of a breakdown of the neckline of the double top shown above at 1.37145, should have a take profit target of 1.31221. The same principle works for a triple top, so it will not be explained here. Simply apply the same principles and work with the figures as described.
- Double/Triple Bottom
The double/triple tops are bullish reversal patterns. Price forms either a reaction high between two price troughs in a downtrend (double bottom), or two reaction highs between three price troughs in a downtrend. A horizontal line is drawn across each reaction high, forming a neckline resistance. Price breaks above the neckline to complete the patterns, and the price projection is obtained by measuring the distance between the lowest trough/bottom and the neckline in a vertical plane, then adding the figure from the neckline’s price upward to form the price projection point above the pattern.
Double top showing vertical height
Distance between bottom (1197.82) and neckline (1258.56) = 60.74 points
Distance from neckline (1258.56) to the upside = 1258.56 + 60.74 = 1319.30
Double bottom showing price projection/measured move
Flags and Pennants
For the pennants and flag patterns, there is an initial trend move (the pole), followed by a consolidation area (which is a triangle in a pennant and a rectangle in a flag), and then the price breaks out of the other side to continue the initial trend. Due to the slanting nature of both patterns, it is difficult to measure the pip distances. Therefore, I use the grid lines or grid boxes to get an estimate of the projected price move of the breakout and hence its price objective.
Setting price objectives in a pennant pattern
In this bullish pennant pattern. We see that the initial price move to the upside was 2 grid boxes in length. So you can simply add two grid boxes above the pattern and set the TP at the appropriate spot.
Setting price objectives in a flag pattern
Deriving the measured move in a flag or pattern is easier, as the boundaries of the pattern provide the basis for the trade entry. The boundaries also make it easier to measure the length of the initial move.
Measured Move: Triangle Patterns
The triangle patterns are:
- Ascending (bullish continuation – 80%)
- Symmetrical (both bearish and bullish continuation in equal measure)
- Descending (bearish continuation – 80%)
The ascending and descending triangle have been known to indicate reversals 20% of the time, but this is rare. So we will work with the common variants of the patterns.
For all triangles, the base marks the vertical height of the pattern. The base is the area found at the start of the two converging trendlines, opposite the convergence point or apex. The vertical height is measured, and extrapolated accordingly in the breakout direction to get the price objective point.
- Descending triangle
The descending triangle is expected to end in a breakdown and bearish continuation, as the initial trend the enters the triangle is a downtrend. Trace the vertical height, then subtract the pip value from the price that corresponds to the lower triangle border.
Descending triangle showing vertical height of base
Vertical height from top (1.42880) to bottom (1.38631) = 424.9 pips (i.e. 0.04249 points)
Price projection below pattern = 1.38631 – 0.04249 = 1.34382
Descending triangle showing price objective below pattern
We can see that the price stalled not so long after the price projection for the pattern was achieved, which goes a long way to validate the lesson being shown.
- Symmetrical triangle
The symmetrical triangle has a neutral bias. Depending on the trend that precedes the pattern, the symmetrical triangle can end in a price continuation to the upside (uptrend) or to the downside (downtrend). Just like before, trace the vertical height, then do the following:
- subtract the pip value from the price that corresponds to the lower triangle border if the initial trend was a downtrend, or
- you add the pip value of the vertical height to the breakout point from the upper border if the initial trend was an uptrend, to determine the price objective above the pattern.
Symmetrical triangle showing vertical height of base
Vertical height from top (1329.98) to bottom (1275.92) = 54.06 points
Price projection below pattern = 1291.64 (breakdown point) – 54.06 = 1235.07
Symmetrical triangle showing price objective below pattern
- Ascending triangle
The ascending triangle usually ends in a breakout and bullish continuation, as the initial trend the enters the triangle is an uptrend. Trace the vertical height, then add the pip value of this height to the price level which corresponds to the upper border in order to get the price objective above the pattern.
Ascending triangle showing vertical height of base
Vertical height from bottom (920.87) to top (961.21) = 40.34 points
Price projection above pattern = 961.21 + 40.34 = 1001.55
Ascending triangle showing price objective below pattern
Please note that the prices may not always be exact. They may be a few pips more or a few pips less than the target, but you can always use your initiative to set the right targets with an error allowance of + or – 10 pips around the projected price target.
Also, you must also understand that sometimes, projected moves may extend beyond the price objective point. This is especially true of chart patterns that resolve to the downside, as price drops tend to be more aggressive than price gains. This is not always the case, but it does happen. Do not kick yourself in the teeth for not holding on for more profits. Take what you can and search for other opportunities.