Measured Move Trading – How to Set Realistic Profit Targets

Technical analysis

Measured Move Trading

Measured move trading is one of the best techniques to deal with the challenging task of determining a suitable profit target. Determining a realistic and suitable profit is crucial for profitable trading. However, most traders find it difficult. They often set targets that don’t get hit. Therefore, it is important to follow an easy take-profit strategy. And here comes the measured move trading strategy into the picture – to make your profit-taking decisions effortlessly easy.

Given the importance of measured move trading, we decided to help you through this complete guide on how to capitalize on measured move trading strategy to set realistic profit targets. So, stay tuned and learn some very important things to maximize the odds of success in your trading. 

Measured move trading

A measured move, also known as the ABCD pattern, is a very important and useful technical concept in trading. It helps traders set realistic profit targets as well as get an idea about the length and duration of a trend. 

A measured move is actually a swing trading concept. It revolves around the assumption that history will repeat itself. That means traders assume that the next leg of a trend or chart pattern will be somewhat similar to the prior one. Don’t consider the involvement of “assumption” to fool you. The logic is the same as in technical analysis as a whole. What is that logic? It is the idea that market activity is predictable because its history tends to repeat itself. 

Furthermore, you are right to be skeptical because it is based on assumption after all. And assumptions, when turned out to be incorrect, can hurt you deeply. However, why do we rely on assumptions? Because volatility of most financial instruments, especially stocks, doesn’t change dramatically without any major news event. So, market activity remains more or less the same. For example, if we look at the historical data of Apple’s stock, it never makes a move bigger than 10%.

Moreover, it is also important to understand that measured move trading isn’t a specific chart part. Although it is also known as the ABCD pattern. ABCD are just reference points for assumptions of the trends. It isn’t an indicator or oscillator either. Rather it is a swing trading concept according to which you can comfortably set profit targets using prior swing sizes. 

Fortunately, you don’t need any special technical analysis abilities or tools for measured move trading. You just need simple drawing tools to draw some lines on your chart. Don’t worry, it’s a big deal. You can easily find such basic drawing tools on any trading platform. Moreover, it is also very easy these days, thanks to modern technologies. It is at least easier than using rulers on printed charts to draw lines as the veteran traders used to do in the past. 

How to set realistic profit targets with measured move?

Setting realistic profit targets with the measured move is remarkably easy and straightforward. Let’s divide the procedure into bullish and bearish moves.

Bullish and bearish measured move

Measured moves are equally useful for measuring profit targets in both bullish and bearish trends. That’s why they are also equally beneficial for both short and long positions. 

Bullish measured move

Bullish measured move trading is about setting realistic profit targets during a bullish trend. It involves pinpointing a few points on the chart.

  • The line connecting A and B points measures the first bullish move
  • The line connecting B and C shows the corrective move forming a higher low
  • Also, the line connecting C and D points measures the next bullish move
  • Similarly, the line connecting D and E indicates the next corrective move forming a higher low
  • And so on

After drawing these lines, you can measure the height of the bullish move from A to B. The next step is to use the reading and project it from point C to determine the best profit target. The good news is you will observe that the stock price will start to decline after hitting your target. It has happened in the past and is likely to happen in the future. Why so? Because, as we already mentioned, stock prices don’t fluctuate much unless and until some major event occurs. 

Furthermore, you should always take some profit off the table if your measured move target gets hit. If you don’t want this, at least take profit on half of your stocks or other securities. Moreover, if you also consider the duration, you can easily measure it. See how much time the stock took to reach from A to B. You can expect roughly the same duration that stock will take to reach from C to D. Duration measurement gives you a psychological boost to hold on to a stock for that much duration. 

Bearish measured move

Bullish measured move trading involves exactly the same principles. The only difference is that it is about setting realistic profit targets during a bearish trend. It also involves pinpointing a few points on the chart just like we do in a bullish measured move. 

  • The line connecting A and B points measures the first bearish move
  • The line connecting B and C shows the bear rally move forming a lower high
  • Also, the line connecting C and D points measures the next bearish move
  • Similarly, the line connecting D and E indicates the next rally move forming a lower high
  • And so on

After drawing these lines, you can measure the height of the bearish move from A to B. The next step is to use the reading and project it from point C to determine the best target. The good news is you will observe that the stock price will start to rise after hitting your target. 

Furthermore, the rules of taking profit will remain the same. The best practice is that you should always take some profit off the table if your measured move target gets hit. If you don’t want this, at least take profit on half of your stocks or other securities. Moreover, you can also consider the duration, and easily measure it. See how much time the stock took to reach from A to B. Again, you can expect roughly the same duration that stock will take to reach from C to D. 

The advantage of measured move trading

Consistent success in trading totally depends on setting realistic and calculated profit targets. History suggests that most stocks don’t complete a bullish or bearish move inside a week. So, if you manage your entry or exit without considering it, you are doomed to fail.

Moreover, trading is a risky arena that is full of surprises, risks, and uncertainties. You cannot expect to succeed without proper planning. Given the fact that you don’t have control over what the market brings for you, it becomes paramount to take what the market offers. So, when to take what the market offers and wait for how long are the aspects that often overwhelm traders. However, measured move trading can help you solve profit-taking riddles. 

So, when to take what the market brings for us? Measured move trading has the answer. This swing trading concept empowers you to do some drawing and achieve realistic profit targets. Although it is based on assumptions these are educated assumptions based on history. And the good thing is, it seldom disappoints you – in case of some uncertain and unpredictable events. However, that is a very rare case. Simply put, measured move trading enables you to make educated assumptions about market moves and leads you to set realistic profit targets. That is the major advantage of this remarkable trading concept. 

The wrap-up

Measured move trading is one of the most useful swing trading concepts. It revolves around making assumptions, based on historical data, about an asset’s next move. The procedure is also pretty simple and straightforward. You just have to pick high and low points on your chart and connect those points with lines. As a result, you can not only guess about the realistic profit target but also the timeframe. How does it lead us to set realistic profit targets? It is simple. Volatility – volatility of stock almost remains the same in normal situations. So, stock prices behave in almost the same pattern as well. Remember, history tends to repeat itself unless some major events make it change its course.

Russell Crane

Russell Crane

Russell is an Algorithmic & Technical Analyst Trader @ PatternsWizard.
His passion is to share his knowledge about TA, patterns & more. Why hope for your trading to work when you can precisely know the performance stat of every pattern?

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