Welcome to this article where we get into the specifics of profit taking and how you can use Fibonacci retracement, measured moves and a keen understanding of up and downtrends, to place your take profit levels properly. As you learn this, do not forget to read our forex broker reviews to get the best forex broker.
Profit taking is one of the things that most traders in the market usually have no idea how to do properly. That is not uncommon. However, you can get over this hump and go on to trade very well, without any of these hitches hounding your trades.
You just need to know a few things that will make this easier. As we get into this guide, it is imperative that you understand your broker is a very important part. For that reason, do not forget to check out our forex broker reviews to get the best forex broker who will serve your needs properly.
Most of the time, you could be looking at something like the downtrend and then feel like you are positioned correctly. Often, you will end up misplacing the profit taking targets.
The most common scenario is where traders set ambitious targets and the price ends up hitting the right spot. With the Fibonacci retracement, downtrend on their position, it ends up leaving their profit talking target in the wild.
For that and many other reasons, you will find it quite beneficial to know where the best profit taking level should be placed. That way, you will not end up misplacing or leaving money on the table because you had to guess.
What we are going to learn here today is called the concept of the measured move. The secrets lie in studying the downtrend, uptrend, Fibonacci retracements, and other key values.
Exploring the Concept of The Measured Move
A measured move in forex, is the action of price where the major advances and declines, are divisible into two equal parts. Newton’s third law of motion says that “action and reaction are equal and opposite to each other.”
What does physics have to do with proper profit taking?
Well, that is what we are here to show you. The implied message here is that where there is a reactionary downtrend in an uptrend or a reactionary uptrend in a downtrend, the next phase we can expect of the price action should move in a specific way.
What we mean is that the price action which continues the original trend, will run the same distance as the first half of the trend move that came before the rally or dip. If you ever observe this on a chart, you will see that the uptrend moves are almost equidistant.
Here is a graph to show you how that would look like:
As you can gather from the name we have used here, the move is measurable. We use the term to refer to the price actions that follow:
- Price moving to break out from patterns like triangles, wedges and rectangles.
- Price continuing from patterns like flags and pennants.
- Price reversals that happen from patterns that bottom our or top, such as the head and shoulders type and the inverse kinds of this pattern.
- Price continuations that occur in the initial trend, with a tendency to follow a period of retracement.
The example that we have given you in the diagram above, moves in the following style: UPTREND- RETRACEMENT DIP- UPTREND- RESUMPTION. This sequence is what we highlight above. In this scenario, the retracement moves made by WAVE B usually takes a dip to about 1/3 or ½ of the original wave A.
It then resumes from the end of WAVE B to and at a point that is the same or almost the same distance as the original uptrend made by WAVE A.
What this tells us is that WAVE C should be a very close duplicate of the first WAVE A.
When you are thinking about profit taking with this, you need to know that you can use the measured move principle. The entry will be at the termination of the countertrend WAVE B and the profit taking level should be set using the distance from the lowest point in the Fibonacci retracement dip and into the future uptrend.
As you can see from this image, we have the measured moves in the uptrend.
To be able to properly derive the measured move in a trend setup depends on your ability to calculate the relevant key areas. The key areas here would be:
- The length of the initial/original trend move
- The end of the retracement/countertrend wave.
The original/initial uptrend move, is measured to be 456.2 pips. How do we arrive at this number? It is simple, you simply subtract the price at which the initial trend started from the peak of the first wave (A). To put it in even simpler terms, subtract the bottom of the WAVE A from the top of the same WAVE A.
The trend which counters the initial trend, is usually 1/3 or ½ of the initial trend’s move. In some instances, it may even be as long as 2/3rds of the initial wave. All you have to do here is take the length of the initial wave and them multiply it by the fraction to get your profit taking level.
Then, subtract the figure in points from the price that is at the top of the WAVE A. that is the given point where the countertrend will most likely make a stop before the next wave (which we now know is the measured move), resumes.
To make this easier to understand, let’s look at an example, using the WAVE A of the NASDAQ 100:
- The first wave (A) started at 2310.6 and then ended at 2766.8. That is a total of 456.1 points
- 1/3 of the 456.1 pips, translated to 152.03 points
- ½ of the 456.1 pips, translated to 228.05 points
- 2/3 of the 456.1 points, translates to 304.6 points
The price levels for a reactionary low from the countertrend, can be extracted from the subtraction of these values from the top of the initial wave (A) and then putting the most likely reaction lows at the 2614.77, 2538.75 and 2462.2 mark.
The Fibonacci retracement on price eventually leads you to 2457.1, which is about 2/3rds of the retracement. To complete this measured move, you ass the 456.1 points of the length of wave A to the reaction low of 2457.1, which gives you the profit taking point of 2913.2 points.
So, one thing to keep in mind is that, when you are setting up the long trade at the reaction low, you should set the profit taking level at around 2913.2 points.
Some of the traders in the market would prefer to use a psychological resistance and set theirs at 2900, which would still give you great points. The move in the example we gave, peaked at 2898.1, which is very close to the 2900 points that psychological support would have given.
The Flag Pattern Measured Move
In this scenario, the measured move in a flag needs to take into account, the distance between the start of the initial trend move that comes before the pattern (the flagpole) and the time that the flag develops.
The distance is extended from the breakout point and then projected into the future; in the direction the breakout will take.
What you see here is measured moves in a flag pattern with downtrend . A picture very similar to this one, appears when you have the pennant pattern. In this second illustration, you see the bearish pennant showing projected moves from the initial downtrend, that are similar.
This is observed as the price breaks below the lower border to finish the measured move, which is equidistant to the pole move with downtrend.
Your job here is to keep an eye on where the price forms support, following the end of the measured move.
To derive the measured move in a flag pattern is much easier than in other patterns. The boundaries of this pattern provide you with the basis for when to enter the trade. They also make it easy for you to measure the first and original move for an accurate profit taking.
The Triangle Patterns Measured Move
There are three types of the triangle patterns and the approach to the measured move of triangles, is the same in all patterns. When it comes to patterns, length does not matter. What matters here is the height of the triangle base.
The base of the triangles, are formed by the vertical distance of the points where the trendlines start, that form the triangle borders.
It is important to know that the trace of the triangle borders, does not start from man empty space. The traces have to begin at the first price highs and lows that make up the starting points for the trendlines.
The trendlines should also create borders that have touched at least two highs and lows, on their journey to the converging at the apex.
This illustration shows moves in a symmetrical triangle. In this symmetrical triangle here, the measured move is perfectly captured from the breakout. It is the same setup you see in the illustration below. The base is extrapolated perfectly into the future from the breakout point to give the basis for a perfect profit taking position.
Deriving the measured move on a flag or pattern is easy because the boundaries of the pattern, are the basis for the entry into a trade. The boundaries are what make it easy to measure the initial move’s length.
Understanding The Psychology of the Measured Move
In order to truly appreciate the measured move, we have to look at the psychology behind it. In order to simplify it, we need to look at it, in the simplest form. Trading with the measured move pattern is a way for us to get clues into the trend direction and the strength it has, to ensure accurate profit taking.
The strength of the trend starts in the BC Fibonacci retracement. We will use the 50% retracement of AB as the guide for trading the measured move and know the strength of the trend.
If the C retrace is less than 505 of the AB range before trading above the B point, we call that uptrend very string. However, if the Fibonacci retracement at C is below 50%, then we conclude that the trend if weak.
You would not label it a measured move until later in the development of the pattern. However, after you get the first leg to the upside, we anticipate that the same thing is going to be duplicate in the second leg. So, trading with the measured move, becomes an easy thing to do.
The Anatomy of The Measured Move’s Structure
The three waves of the measured move, have specific parameters which can help you categorize them with ease. Let’s summarize them and make sure that everyone knows how to identify them.
- First Wave (Also called the Impulse Leg)
This is the bullish version of the pattern and the occurrence of the impulse leg is often a part of the double bottom or inverted head and shoulders pattern. The beginning of this first leg could also occur after a period of consolidation.
- Second Wave (Also known as the Corrective Leg)
This second wave can show up as a retracement of the first leg or it can be a sideways movement. In any of the cases, it plays a corrective role or a consolidation of the first leg in the measured move.
Here, we use Fibonacci retracement to measure the size of the 2nd wave before it even appears. In the Fibonacci retracement we do, the 2nd wave is usually very likely to hit the area of the 38.2%-50% retracement, if the first leg turns out to be long or when 61.8% of the initial trend, is of normal size.
Sometime, when the 2nd wave is complete, the pattern might start to look like a bullish flag.
- The Third Wave (also called an Impulse Leg)
The third wave within the measured move is called the impulse leg and is the one which you prepare to trade. It appears at the end of the second wave, after the second retracement is complete.
Never rush into it though. You have to know that the actual confirmation of the measured move, comes after the end of the 2nd wave retracement and the beginning of the 3rd wave.
In this sketch, we have each of the three moves and they are labeled ABC as usual. It is important for you to know these simple formulas:
B is equal to 38.2% or 61.8% of A
C is equal to A
With this simple guideline, you can properly identify and make a good guess about the direction and potential of the measured move pattern, downtrend .
You should also know that the price retracements and the projections, give more reliable results than the time projections. Time is only for illustration purposes in this context.
There is a lot to learn when it comes to the Fibonacci retracement and the techniques you can use for taking a profit. Look at everything from the uptrend to the downtrend to make sure that you know where you get into the market and when to leave it.
As you do that, peruse our collection of the best forex brokers in our forex broker reviews, to get the best outfit to work with. You are only as good as the broker you have and that has never been truer than in the modern world where most of the scams make people fail even before they begin.
As you learn to master these patterns, you will find it much easier to get the perfect places for profit taking.
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