Chapter 7
Measured Moves Based on the Size of the First Leg (the Spike)
A measured move is a swing that is equal in size to a prior swing in the same direction. You estimate how far the market will go on its second attempt based on how far it went on its first. Why do measured moves work? If you are looking for a measured move, then you believe that you know the always-in direction, which means that you are probably at least 60 percent certain that the move will occur. The measured move is usually based on the height of a spike or trading range, and the initial protective stop is usually beyond the beginning of the first move. For example, if there is a strong buy spike, then the initial protective stop is one tick below the low of the spike. If the spike is huge, traders will rarely risk that much, and will usually still have a profitable trade, but the theoretical stop is still below the spike. Also, the probability is often more than 60 percent. If the spike is about four points tall, then the risk is about four points. Since you believe that the measured move will occur and that the strategy of buying at the top of the spike is sound, then you are risking four points on a 60 percent bet. Mathematics dictates that your belief (that the strategy will be profitable when the probability is 60 percent) will be true only if the reward is at least as big as the risk. This is discussed in Chapter 25 about the mathematics of trading. This means that for the strategy to work, you need ...
