Measured Moves: Simple, Powerful and Profitable Trading Tools (Part 3)


Note that in part 2 I have ‘stacked’ or drawn in zones that are of equal height, one on top of another. These stacked zones represent the concept of equal actions—in essence, price will eventually top out and when it does, it will likely top out at some multiple of the original trading range.

You can see I added an up sloping median line or pitchfork and its upper and lower parallels. Note that the upper median line parallel of the pitchfork and the third horizontal parallel line above the original trading range intersect at the area where price tops out. This is an area of confluence, and many types of measured moves can be combined to find areas of confluence.

These can be very powerful measuring techniques, yet they are simple enough that the Phoenicians, more than 4000 years ago, may have employed some of them in their own decision making when trading.

Let me show you another example:



This is a chart of Consolidated Energy, a stock traded in the United States. Price has been in a nice up trend but then it pulls back and violates the lower median line parallel. While there are high probability entry techniques to use after this type of precipitous drop, they are beyond the scope of this article and you can read about them in my books or on my web pages. In this article, we are concerned with measured moves, so we will assume the trader knows a way to get long once price makes the steep decline. The key again is how does this trader maximize profits once price begins to quickly climb out of the hole? Let me repeat the earlier phrase ‘That which is below is like that which is above’! Simply measure the amount price undershot the lower median line parallel and then project that same price distance above the median line or center line to get a high probability target area to take profits. As you can see, what worked for the ancient Phoenicians still works wonderfully well in today’s many markets.

More in part 4 tomorrow.

By Tim Morge

Measured Moves: Simple, Powerful and Profitable Trading Tools (Part 2)

The early price records and charts of the Phoenicians that have been found suggest they looked at just such types of ‘value’ trading when making purchases and then when selling off their inventory. Remember that they lived in a part of the world where flooding and drought were common occurrences, so if a trader took advantage of the natural measured cyclic activity, he would generally be rewarded financially; this means that when there is a glut of grains, for example, there eventually does come a time when the price and time is right to buy and enter long positions. And of course, it also means that when drought or famine came, there came a time when well-positioned Phoenician traders knew when to take their profits! Now let’s extend that idea a moment, with the phrase ‘That which is below is like that which is above’ in the back of our minds as we view another chart of corn futures:




Once price breaks out of the clearly defined trading range and heads much higher, it is obvious that a ‘normal trading situation’ is no longer at hand and windfall profits can often be had in these types of situations, if a trader is positioned correctly and also has a method to help project a meaningful target. Though the method shown above is by no means a ‘hard science’ statistical approach, it is the type of approach a trader that is using hand drawn charts and equal or regularly spaced measured moves might employ. Once price breaks above the highs marked on the prior chart, it is obvious there is unprecedented demand for corn, as shown on this chart. You don’t need to know if it is because there is a drought, or someone invented a car that operates on an ear of corn per 500 miles! The chart above tells you early on that the demand for corn has increased dramatically and if you are already long corn, your only concern is how to maximize profits, because a move of this magnitude comes infrequently.

More in part 3

Measured Moves: Simple, Powerful and Profitable Trading Tools (Part 1)
Monday, May 05, 2008

Using 'measured moves' when trading is very popular and best known by traders that use them as 'Fibonacci' ratios, even though the ratios they are using were actually first described in a mathematics treatise written by Euclid around 300 BC. The early Greek mathematicians and architects had an eye for beauty and symmetry and built pleasing ratios into their designs well before Euclid was born. Although many traders have heard of, and use 38.2, 61.8 and 1.618 ratios, even earlier Greek and Egyptian scholars and artists found beauty, form and function using 1:1 ratios. An early mystic book whose roots goes back to 2500 BC, The Emerald Tablet, refers to 'That which is below is like that which is above', a passage not only known by but studied by Sir Isaac Newton, the father of modern physics; in fact, many scholars believe his Third Law of Motion, 'For every action, there is an equal and opposite reaction', has its roots directly in this passage from this work done roughly 4000 years before Newton was born.

One of the earliest known groups of traders was the Phoenicians and they flourished in the same area as the early Greek civilization around 1200 BC. Modern day archaeologists have found clay and lead 'trading slips' and even what appear to be graphic representations of prices over periods of time of certain commodities that the Phoenicians traded on a regular basis-in other words, the Phoenicians were one of the world's first hand chartists! One of the inscriptions on these particular clay charts reads 'There is a time to buy and a time to sell'. Though the Phoenicians are credited with creating today's written alphabet [theirs featured twenty-two characters that were used in combinations to form words, much like twenty-six characters are used in the English language to form specific words], it's unlikely they used technical analysis tools like MACD and RSI to time their buying and selling. What, then, would the Phoenicians have used to determine when to buy and when to sell?

Let me show you a simple set of charts that illustrate the types of measured moves that the Phoenicians may have used:

On this chart, you can see that corn prices have been in a wide trading range for quite some time. You can see that as price approaches the bottom area of congestion, it has been profitable to enter into long corn positions and as price nears the upper portion of the area of congestion, it has paid to lock in profits.

More in part 2 tomorrow.

By Tim Morge
tmorge@sbcglobal.net
www.medianline.com
www.marketgeometry.com