Chapter 8
Measured Moves Based on Gaps and Trading Ranges
Gaps are common on daily charts where the low of one bar is above the high of the prior bar or the high of a bar is below the low of the prior bar. If there is conviction about the direction of the market, the middle of the gap often becomes the middle of the trend. As the market gets near the measured move target, traders will look carefully at the exact target and often take partial or total profits in that area, and some traders will begin to take positions in the opposite direction. This often leads to a pause, a pullback, or even a reversal.
When a breakout occurs on an intraday chart, only rarely will this kind of gap appear. However, there is often something just as reliable, which is a gap between the breakout point and the first pause or pullback. For example, if the market breaks out above a swing high and the breakout bar is a relatively large bull trend bar and the low of the next bar is above the breakout point, then there is a gap between that low and the breakout point and that often becomes a measuring gap. If the bar after the breakout is also a large bull trend bar, then wait for the first small bull trend bar, bear trend bar, or doji bar. Its low is then the top of the gap. If the breakout point or the breakout pullback is unclear, the market will often just use the middle of the breakout bar as the middle of the gap. In this case, the measured move is based on the start of the rally to the middle of ...
