Measured Move – Bearish Chart Pattern

Ever thought about how experienced traders always predict market trends? Identifying specific chart patterns, like measured moves, is one of their key secrets.

In today’s blog, we will explore one of the most reliable chart patterns used by technical analysts and how they use it to enhance their gains.

What is the Measured Move Bearish Chart Pattern?

The Measured Move Bearish chart pattern predicts a possible price decrease or a bearish trend. Initially, a stock undergoes a significant drop and then enters a phase of consolidation or sideways movement, forming the pattern. It is considered complete once the price drops below the lowest point of the consolidation phase.

To recognize a Measured Move Bearish chart pattern, traders generally look for two swing lows, followed by a corrective wave that retraces a specific percentage of the initial price move. The initial downtrend can also be followed by a rectangle or a descending triangle-shaped consolidation. Once these criteria are met, a target level can be projected using the measured move technique.

Interpretation

The pattern predicts future price movements based on previous price actions. The pattern consists of three phases, which suggest the continuation of a trend. The summary of the three phases is mentioned below:

• Initial Move – The patterns start with a downward price movement.
• Correction or Consolidation – After the initial downtrend, the price goes through a period of correction or consolidation, moving sideways or slightly against the initial trend.
• Measure Move – It is the expected distance the trend will continue after the breakout from the consolidation phase. It is calculated by measuring the distance of the initial move and projecting it from the breakdown point of the correction or consolidation phase. Some traders consider the initial move in percentage terms and use it to calculate the target price.

How to Determine Target and Stop-Loss?

The target price can be determined by calculating the length of the first movement from the point of breakout in absolute terms or percentage terms. For instance, if the initial downtrend was a 10% decrease, then the target would be 10% below the breakdown point.

For a bearish measured move, the stop loss can be placed just above the high point of the consolidation phase to protect against losses in case of a false breakdown.

Example of Measured Move

The above image shows the daily chart of Godrej Industries on a daily timeframe, and a clear formation of the Measured Move Bearish chart pattern can be observed. We can observe the pattern in three phases:

1. The initial move (AB) is a sharp downtrend.
2. The consolidation phase (QRBP) shows a sideways price movement.
3. The measured move (RN) is the expected downward movement from the end of the consolidation phase, which is equal in distance to the initial downward trend.

Advantages of Measured Move

The advantages of using the Measured Move Bearish chart pattern are:

• Clear Indication of a Trend – It offers a visually distinct representation of a bearish trend. This makes it easier for traders to recognize the ongoing trend and make better trading decisions.
• Simple – This pattern is relatively easy to use and implement, making it useful to traders of all levels.
• Objective Measurement – Traders can determine the target and stop-loss levels objectively by analyzing the components of the pattern. This helps reduce the subjective-decision making.

Limitations

The limitations of using the Measured Move Bearish chart pattern are:

• False Breakouts – Prices may temporarily breach the consolidation phase but swiftly rebound, causing a deceptive breakdown. This situation can cause losses for traders who enter short positions too early.
• Confirmation Needed – Confirmation is required before entering a trade when there is a breakdown after the consolidation phase. You may need to wait for a retest of the broken trendline or look at other technical indicators for more support.
• Market Conditions – Volatility, volume, overall market sentiment, etc., can affect the pattern’s effectiveness.

Conclusion

Technical analysts find the measured move chart pattern to be an invaluable tool for identifying possible price movements. The pattern works well when combined with other technical indicators and increases the probability of successful trades. However, it is important to remember that no technical analysis pattern is perfect. While the measured move strategy may not always unfold as anticipated, it is crucial to analyze it carefully for a more comprehensive analysis. An investor must consult a financial advisor before investing.

Frequently Asked Questions (FAQs)