Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Measuring Principle

What it is:

The measuring principle allows traders to set a specific minimum price target when trading a stock. This technique works with any well-defined technical analysis pattern, such as a head and shoulders, rectangle or triangle.

How it works (Example):

To use the measuring principle to calculate the minimum target for an expected share price move, first establish the height of the pattern. In the case of the S&P chart below, we have a potential four-month topping pattern, with a peak at 1295 and clear support at 1245. If support is broken, then the pattern would take the form of a head and shoulders top. Using this example, the simple calculation looks like this:

Peak: 1295
Support: 1245
Difference: 50 points

Once the height of the pattern has been established, either subtract that amount from the broken support level or add it to the level where the stock breaks out above resistance. In this case, the break will be below support, so we will subtract.

Breakout level: 1245
Less: Height of pattern: 50
Minimum Target: 1195

Once this target is established, traders should then determine if it makes sense with the rest of the technical picture. The S&P's major trendline is at 1200, so a break of key support would lead to a pullback to that trendline. The lower Bollinger band is at 1175 in the example below, so a decline would end above the band. In my mind, this kind of additional reasoning gives further credence to the target.  

Why it Matters:

The measuring principle may have no fully logical explanation, yet it works uncannily well in most cases. However, if the market begins to send a different message, then the trader should be prepared to adapt. After all, the measuring principle is just a principle, not a law.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...