In Price Action Trading Strategy

Today's discussion revolves around one of those topics that, depending on the level of experience of the reader, oftentimes provides an “ah-ha” moment. And when I have talked about today's topic in the past, I am humbly assured that my emphasis on them hasn't been strong enough. I learned about these many years ago, but only one variant, and struggled to apply them correctly. I was missing one simple thing, which is described below.

Without any hesitation, I can say that one of the top 3 issues people face in this business is knowing where to get out of their trades. The amount of focus put on trade entry can be completely nonsensical because you're never going to get where you want to be either using poor risk reward by snapping profits in seconds or without having any functional “architecture” to your trade assembly.

When we trade correctly, we are not just entering a position: We are forecasting a chunk of price action that has yet to occur. That's our job / our goal / what's required to make money. And that's the focus of this post.

Pinpointing a perfect trade entry is typically the first thing that comes to mind when people start digging for trading strategies and ideas. But finding good trade entry means nothing if we have no idea how long the move is going to last.

And no entry technique will work one hundred percent of the time, so we can't just simply snap at profits the second our position counter turns green. Additionally, we all know that exceptional risk reward equals longevity. But most people have an extremely hard time getting to the point of using good reward to risk because they don't know how to set reasonable profit targets.

Measured Movements

As it's now obvious, today we're going to get started on measured movements.  I've already prefaced these as stating their value strictly in terms of taking profits, because that's where this particular article is going to place its focus. But there are multiple uses for these, as you'll start to see in the examples below, and as we'll discuss in future posts.

There are many, many ways of calculating future price movements. In this post we're going to discuss the one method I have been using the longest and can be learned and applied relatively easily, and in any market: Forex, Futures, Equities, you name it.

Others variants are going to be discussed in the future because simply stated: it's uncanny how well this market responds to these extensions sometimes. What's better is that, at least with the variants in this post, there is no ambiguity in terms of how to draw them.

If you would like a sneak preview at future writings you can check out this chart or this chart I posted to Twitter, Facebook and Google+ last week, but I ask that you don't get too far ahead.

Now as usual, I have to state: none of this is new, with the exception of two variants I have personally found to work well that I haven't yet seen discussed elsewhere. And any explanations on the topic are, as usual, buried deep in the guts of books and the internet. Many institutional traders (and their algos…which is probably more relevant here) tend to revert to range extensions as a means of taking profits. I generally lean on the conservative side of these extensions in the event that I miss anything on the chart. I'm not perfect, I realize that, and being conservative in taking profits is my way of buying insurance on the trade.

It Starts With Good Entry…

We've talked about the high value of inner trendline breaks on this website in the past, but what about those outer (peripheral) trendlines? (for the newcomers, this chart quickly explains the difference between the two) I generally don't take breakouts on outer trendlines. I have found myself in too many undesirable situations well in the past to think about it for more than a few moments.

What happens so often is this: so many people are are looking at that trendline to the point when it finally comes time for it to get hit, price starts acting like a convoluted mess. When price finally hits the major ones and pokes through, I grab popcorn and watch, but I now rarely trade.

Why?  Because it's not easy. Plain and simple. The following chart is a prime example of what I'm referencing – eyes on the red circle:

EUR/USD Trendline

See that chunk of price? It's a no holds barred battle of bulls and bears fighting between a preexisting trend, a range, and potential reversal. And of course it's a horrible place to put on a new position short, expecting that trendline break to follow through (no confirmation here either).

Some people would try to sound more intelligent here and bother explaining the mechanics of that “false breakout” – but let's get serious: does it matter?…most people would lose their wallets in that mess (including the ones “explaining” it), and that's why I only now look for clean retests.

And this is also why we look for ways to enter above this trendline, in the event that something like this happens, using breaks / retests on inner trendlines, ascending or descending triple taps, double tops, or any other number of confirmation methods available. Always.

Once cleanly broken, however, that's another story, one which begins now:

It Ends With An Informed Take Profit…

Major, diagonal trendlines send a very clear signal to the world once broken. Longer term traders commit and the whole world gets queued in as to what the next major movement is going to be. Flows shift and a new momentum gets underway.

So when that trendline breaks clean , how far is it going to go? Just measure.

Take out your Fibonacci drawing tool and make a quick adjustment. Add the value 2.0. This is an extension, not a retracement. It should look like this:

100 Percent Extension

2.0 is exactly double your measured range, or 100% of it added to your peak or trough. Simple. For the rest of this post I have removed all other numbers on the Fibonacci scale to make this easier to visualize.

Essentially what we're doing here is projecting a future price movement based on a witnessed break of a strong trendline…

Variant 1: Peak or Trough to Break (Conservative)

Oftentimes you'll see price running a little beyond this way of measurement, because as I stated in the title, this is the more conservative path to take profits with this method. We'll talk more about using these as reversal points in later posts. Please refer to the image (click to expand) for the appropriate explanation:

Measured Movement Example 1 Forex

 

Measured Movement Example 2 Forex

 

Measured Movement Example 3 Forex

Variant 2: Peak or Trough to Pullback Before the Break

This variant generally yields more and behaves more favorably as a price turning point in the future. In the event of a strong breakout of a outer trendline, however (as in Example #2 above), you are simply unable to do this.

This example shows this variant on the same chart as the Example 1 above.

Measured Movement Example 4 Forex

Not too shabby. Just start working with these and you'll gradually become more comfortable in terms of how they get hit.

Variant 3 (and most commonly discussed): Peak or Trough to Trendline Point Below It

Once again, I am using the same chart as example 1. And for the record, I did not choose this chart because it fit so snugly with all of these examples. It was literally the first reversal I zoomed in on.

Measured Movement Example 5 Forex

Have I scared you yet? If not, good. This should come as no surprise how cleanly these prices register. Behind every market move there is a plausible explanation, as ridiculous as it might seem sometimes. And this is just one of them that happens to occur quite frequently.

What to Look For and What To Avoid

Cherry picking charts that show this method “working” all the time does nothing but fill your head with the idea that it will do just that in all situations. There are certain things you need to be aware of before going into battle:

First, that “one simple thing” I spoke of in the beginning of this post was confluence. Traditional methods tell you to draw your broken trendline on the outside of price, but this trendline holds little value sometimes.

Confluence in the way your draw your broken trendlne is extremely important when it comes to this general concept, much more so when we start talking about fading these extensions. Draw your trendlines using the most historical hits possible, just like everything else we discuss on this site. If a pullback (retest) registers around your projected trendline, draw backwards and make sure you're looking at the right one.

Let's go back to that spike to illustrate this (3rd example in the 1st variant), using an outer trendline as a means of measurement.

Measured Movement Example 6 Forex

So no success there, but for the reasons stated above. We only have 2 hits on that trendline, so can we even consider it valid? The easy answer is no: look for a minimum of 3 touches, above or below. The more confluence, the better.

So in this same example we do have something of interest: an inner trendline with more hits than the “obvious guess”.

Measured Movement Example 7 Forex

Confluence. You can see that the inner trendline had more hits, so essentially you're basing your future decisions off of this mark.

Second, a general scenario comes to my mind when it comes to projecting future movements within a trend:

You can generally cut most trends up into at least 3 major legs. Take a look at this article and go to the section about Fanning to better understand this. Whether it is the 3rd leg, or a hard spike, realize that most of the “work” is now done for the day or week and that any ranges created at the base of these aren't likely to go much lower too soon. Just be conscientious of the fact that you might be establishing a position near a potential exhaustion point. Using confluence in the break is one way to confirm this, however, as shown above.

One final major thing you want to be on the lookout for are simple V tops and bottoms, driven by some form of economic surprise that the market essentially hasn't “priced in”. This is a forward-looking market. By the time the news hits the wires, participants have already traded price to where it “needs to be”. V tops or bottoms are typically driven by:

1. A market taking something for face value moments after it gets released (eg price sharply moves lower), then later “digesting” it, and realizing the longer-term direction should be the exact opposite (eg price sharply moves higher).

2. Unexpected data or announcement completely interrupting a previous move.

When these happen, one move is interrupted by another, and many technicals have now lost their value.

For price targets only, you can also shave off the “wicks” of the peak or trough as well, but just realize that when you do something like that, your reward to risk ratio drops.

Here's one final recent example to drive this point home using 2 instances of Variant 1:

EUR:USD 2 Measured Moves

Again, look for the line that gets the backward retest or heavy historical hits and use it as your meter. This is one thing that I wish I knew in my early days of using this.

Essentially you can work your backwards when establishing the proper broken trendline to use for measurement. Start with the retest (if there is one) or most historical hits (inner or outer trendline). In a live trading environment your process is going to look something like this:

1. Position taken long or short.

2. Take profit immediately placed in a conservative zone based on the assumption of a secondary trendline being broken (but not the steepest – those break almost instantly).

3. When broken / retest received, fine tune your take profit. You have more information now, so you mine as well use it.

How to Apply These

Last week we discussed how to bridge the gap between learning and application in trading. I'm making this a huge focus these days because literally just about everyone drops the ball in this department.

My recommendation for picking up this habit is to start off easy, and like I had to when coming with these examples today: dig through your market history and just draw. Zoom in on the first reversal you see and apply. Once you become somewhat acquainted with the way it works stop right there, and start drawing these on live charts. You MUST look forward in order to learn this or any other concept properly, in my opinion.  You are going to squirm a bit because you're not used to it yet, but you will be over time. Also, we're not done with these yet here on NBT. Please don't start fading the bottoms of these thinking that all will be well, in any circumstance – more on that later.

So without flooding this post with even more charts, I encourage you to go out and start exploring your territory with these. Your own experience will matter most anyway and the list above can be considered the bulletpoints. Measured movements can serve a variety of purposes, and this is just one of them. There are many more to discuss, and will be done in future writings.

Additional Resources

For more reading on this topic, well, there isn't much, despite its value (isn't this typical). As discussed above, Variant 3 is the most discussed, and my personal first introduction to it was many years ago, by Tom DeMark. And I can't say if he's the original source on this – I truly have no idea. His means of describing it was, however, unique, as he seeks out strictly objective ways of doing it.

Variants 1 and 2, as well as stipulations in the last section, are my own creations based on the pleasure of pain over the years working with these.

To my knowledge, Variant 3 is discussed by DeMark and Tom Bulkowski, but both have their own means of using diagonal trend lines. And not to criticize their studies (and I truly mean this), I have simply found more value seeking higher confluence in the broken trendline (example, Tom DeMark uses TD Points to draw his, which I generally don't use for pinpoint execution on retests). Lastly, the term “Measured Moves” itself, after some quick Google searching, dug up only one name: Al Brooks. I quickly searched and found that this topic (and more about is covered in his second book “Trading Price Action Trading Ranges”) albeit not as much as I would have liked but still a good “heads up”. I purchased and read the entire book last week and he really jives well with many of the topics we discuss here.  And he even covered some of the topics I intend on discussing in the future with these, but again, not specifically to the form I prefer, based on my experience in this market. As I said earlier though, I like insurance on my trades as much as I do precision, and that's why I have options and go to the extent that I do, listed above.

—————————————————————————-

If you have questions, input or anything else to say, please use the comments section so that everyone can benefit. If more explanations are needed I can update the post after it's digested by an audience. Also feel free to post your own examples by using links in any comments.

Finally, sharing our posts and raising awareness helps us out tremendously. We are still trying to regain traction from our recent fallback in posts, and it's very much appreciated. Thanks again for stopping by,

-Steve

Chart sources: https://www.tradingview.com/

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Showing 44 comments
  • Dave Campbell
    Reply

    Great Article Steve. Measured moves have been in my tool box for years. Your article here is spot on. Good to see you back from the dark side LOL. Good trading. IMFX

    • David
      Reply

      Hey Ironman,

      Long time no see, last time I have seen you was at 50’s. Did you trade your company in for some full-time trading?

    • Steve W.
      Reply

      Hey Dave good to see ya around and thanks – indeed more to write.

      • Dave Campbell
        Reply

        Steve, your articles are always pertinent and to the point. Keep up the good work!

  • David
    Reply

    Those fibs really work good and you use them almost like I use them, interesting to see that. You certainly know how to write some articles that add some serious value. Will send Larry Williams a message with this article, he is always mocking trendlines.

    • Steve W.
      Reply

      Can’t say I can relate to a lot of his concepts as I’m sure you’re aware but hey, if it works for him thats all that really matters – and thanks for the compliment – I got your message by the way and yes, it’s intentionally trough – maybe just ‘low’ would have been a better way for putting it.

  • Desmond
    Reply

    Thanks for the clear explanation for the different variations of measuring a move. I have always taken a trade in profit out too early. And I believe that to be the single most devastating shortcoming in the development of my trading skill or knowledge. Fear, arises becuase of the unknown. Until this ignorance is removed and addressed, one’s success in trading could be a very long journey. Thanks for you have addressed this unknown/ignorance through your very timely and well written piece. Keep it up and May God bless you Richly through an abundance of pips.

    • Steve W.
      Reply

      Thank you Desmond – much appreciated and thanks for dropping by.

  • Jags
    Reply

    Another great article indeed. It will help me hone my use of trend & support lines. I have a theory that trend lines have a much longer life span than many give them credit for.
    Thanks again Steve.

    • Steve W.
      Reply

      Thanks Jags and yes that’s one thing I’m pretty vehement about – they’re (at least in my opinion) the most under-discussed ‘indicators’ for a countless reasons.

  • thomas
    Reply

    very interesting article – i never heard before about the inner trendlines – measur a target with your method – gives me a drive in my trading – will test it – hope to see mor such interesting articles in the future. thanks a lot for yur work. kind regards

  • thomas
    Reply

    thanks a lot for this interesting article – this inner-outer trendline breakout works in very timeframe – in which one best ??
    kind regards ts

    • Steve W.
      Reply

      While it’s all relative I generally stick with 15 and above, using 5 min bars to usually confirm.

  • Pete
    Reply

    Great stuff Steve and welcome back! 🙂

    I have seen Todd Kruger talk about measured moves but only in regards to waves AB = CD. He uses Bryce Gilmores wave rider software which basically measures each leg to retrace second leg to retrace etc. Having a second or third leg of the approximate same distance as the first or second into a level of confluence eg. major fib, fib extension and or pivotal level (high/low), or previous pivot that has been exceded. Kruger also uses Gann Square and more bizarrely Music Ratios. The measured move into such leves increases the chances of price reversing in these areas of confluence. Position size is then adjusted to suit the strength of the potential reversal. Should the measured move not be in synch with the previous move/s but the confluence of other factors remains strong then a lower risk size is traded.

    • Steve W.
      Reply

      Thanks Pete – yeah for all my work with Fibs over the years, trying to find a way to get the most consistency (expectancy/win rate), I still have a very difficult time trying to standardize it all and find something I can use everyday. I found that the patterns that extended outside the range worked better for me overall (butterflies, crabs, etc) but we’re talking in a very general sense.

  • matt
    Reply

    This is a very good article Steve, I appreciate it a lot. I looked over my charts (4hr) and to be honest, you’d be hard pressed not winning most trades with an average of 1:2RR if you played these.

    • Steve W.
      Reply

      As I say it’s just another one of those things that’s right in front of most people but goes unnoticed, and there are other ways of doing this as well but not necessarily using diagonal trendlines of course.

  • Mark Hunter
    Reply

    Clearly written article, Steve.
    Thought provoking.
    Thanks.

  • Jags
    Reply

    The extended life of a Trend line. They are very powerful, & financially rewarding. The attached I believe adds to the body of evidence that Steve puts forward. It is why (I think) that E/$ dropped at todays open & then again after the bounce in $/chf.
    https://www.tradingview.com/x/adeM9CHY/

    • Steve W.
      Reply

      Thanks Jags – one thing I notice too was if you draw a trendline on the base and you’ve got a rising wedge – and curses to anyone that labels this strictly as a reversal pattern 🙂 – especially in this market you see them break that upper channel and pop out to the upside quite frequently. Also a clean retest on the inner trendline (placed on top of the trend) before it punched upwards and onwards.

  • pippadoc
    Reply

    Hi Steve, Good to hear from you – posted something related in nbt just last week and yesterday in FX Factory – without your lucid explanation though. Hope to hear of developements

    • Steve W.
      Reply

      Thanks very much PD and appreciate the nod. Will do – more to come.

  • Toby
    Reply

    Excellent article Steve. Thank you. Had I read and absorbed it earlier in the week, I would have saved some pips. Took a trade (short) on gbpchf but lost the bulk of it due to lack of planning re. taking profit. Having tonight read your article, I measured the move and guess what? Price reversed within a pip of the 200 mark. On the plus side, this error has taught me to plan my trades more thoroughly in future.

    • Steve W.
      Reply

      Thanks Toby and yep, we’re not done on this yet – I might skip around a bit in terms of upcoming stuff but all for good reason.

  • Simon
    Reply

    Quote:
    “But finding good trade entry means nothing if we have no idea how long the move is going to last.”

    Reply:
    Probably main reason for 99,9% ‘trading losers’ (speaking from personal experience which ended my W.B. (no, no, not Warren Buffet, rather Wanna Be – LOL) top FX trader.

    Thumbs up, keep the good work,

    Best regards,

    Simon
    S love nia

    • Steve W.
      Reply

      Thanks Simon. Much appreciated and all the best!

  • Kas
    Reply

    Hi Steve, thank you for such clear explanations. You have started me on my next phase of learning. I have previously never understood the confusion i have felt over the use of trend lines. Now i see why i was so confused. Thanks again

    • Steve W.
      Reply

      You’re welcome Kas – glad it could help.

  • Antony
    Reply

    Yes & Yes. Thanks Steve!

  • Geoff
    Reply

    Thought I’d share my analysis of the recent breakdown in the EURUSD. Note how the 100% and 161.8% levels get used as support and resistance. Will it make it down to the 200% level?

    https://www.tradingview.com/e/mIdufh0C/

  • David
    Reply

    Hi Steve, been racking my brain on this so hope it’s not too late to ask a quick question. Love trading the breaks of inner trend lines. My question is, do you always look to trade ( and wait ) for the swing retest or get in on the price retest on the break ( hope that makes sense) Do you look more for one or hold off for the other or even take both off price and again swing retest on the trend line your waiting to break. Really appreciate your help. As always, can’t thank you enough for what you do.

  • Chris
    Reply

    Hi Steve,

    Finally I was able to catch up with this article (and more to come). Just took a profit at an upper trendline and noticed that it was a 100% extension as well. https://dl.dropboxusercontent.com/u/15813135/22-07-2013%2003-41-31.jpg
    Thanks for all and I hope your doing well.

    • Steve W.
      Reply

      Thanks Chris,
      Yup, all is well and hanging in there. Hoping to get back at it soon. Thanks for sharing… Always love hearing about this kind of stuff.

      • Chris
        Reply

        btw I totally thought the most common method to do price projections off a trendline would be the same as the projection of a classical head-and-shoulders pattern (take the distance from peak to trendline and add it to the breaking point of the trendline).

  • Mert
    Reply

    Hi Steve,

    very interesting article and i would like to understand everything and working links to the charts would help a lot. Is there any chance to get the chart at +Google or so? Sorry but no link is working… http://1.nobrainertrades.com/wp-content/uploads/2013/02/Measured-Movement-Example-1.jpg

    I think this would also helpful for other readers.

    Many thanks,
    Mert

    • Steve W.
      Reply

      Yeah that is very strange. I just tried purging the CDN and local cache completely, clear browser cache and hopefully it will work. I recently changed webhosts and so the IP address for this site changed along with it. But I clearly remember going through the steps and whitelisting the IP, etc. The only other thing I can think of is that you have a FireWall blocking MaxCDN servers for whatever reason. I know others have had trouble getting certain elements on this site to work properly recently, so hopefully the purge did the job.

    • Steve W.
      Reply

      All fixed for now Mert. Odd issue but you should not have any more bad responses from the server. Thanks for the heads up!

  • tom ramone
    Reply

    Hello Steve, do you still believe Al Brooks to totally legit? I have read most of his first book and I know he has vast market knowledge, but have remained very suspicious that he good at pointing out a lot of happenings with out ever really saying anything. You think his style of day trading is profitable and that he really runs a paid webinar to help other and not as his main income source besides selling books?

    • Steve W.
      Reply

      I mean it is like anything else – I would just read what’s already there and just see if it is clicking. I never got past only one of his books and a lot of it gets left to the wayside because its not a clean read. If you have read any trading books before you will know that you usually just end up taking what you need and leave the rest anyway. Usually you can filter through the muck pretty quickly. Books are cheap.

  • David R.
    Reply

    I’ve only recently come across nobrainertrades and what a great site. I just applied a measured move on EUR/USD starting main diagonal on a 4 hour chart with confluence, with the inner lines on 1 hour and 15 minutes charts respectively. Provides a great framework to trade rather than random entries/exits

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