Subscribe to RSS feeds Bulkowski Blog via RSS

Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

Support this site! Clicking the links (below) takes you to Amazon.com. If you buy ANYTHING, they pay for the referral.

Picture of Bumper.
Kindle
Paperback
Nook
Picture of the head's law.
Kindle
Paperback
Nook
Chart Patterns: After the Buy
Getting Started in Chart Patterns, Second Edition book.
Trading Basics: Evolution of a Trader book.
Fundamental Analysis and Position Trading: Evolution of a Trader book.
Swing and Day Trading: Evolution of a Trader book.
Visual Guide to Chart Patterns book.
Encyclopedia of Chart Patterns 2nd Edition book.

Bulkowski's Measured Move Retrace

Class Elliott Wave Fundamentals Psychology Quiz Research Setups Software Tutorials More...
Busted
Patterns
Candles Chart
Patterns
Event
Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 11/15/2018
25,289 208.77 0.8%
10,615 158.69 1.5%
715 -9.55 -1.3%
7,259 122.64 1.7%
2,730 28.62 1.1%
YTD
2.3%
0.0%
-1.2%
5.2%
2.1%
Tom's Targets    Overview: 11/14/2018
26,800 or 24,500 by 12/01/2018
11,000 or 10,100 by 12/01/2018
710 or 750 by 12/01/2018
6,900 or 7,700 by 12/01/2018
2,650 or 2,800 by 12/01/2018

Written by and copyright © 2005-2018 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners.

Initial release: 5/16/2018. Corrected: 5/17/18

This article discusses results from two studies on retraces as they occur in measured move up and measured move down chart patterns.

Summary

I wanted to automate finding measured moves, so I did research and discovered that the larger the retrace, the more likely the second leg of a measured move up or measured move down chart pattern would equal the first leg.

Incidentally, version 7.2 of Patternz has measured move up and down patterns implemented with this new algorithm.

Background

Picture of a three point turn.

The picture on the right make this discovery clear. The chart shows the two varieties of measured move chart patterns. The top one is a measured move up and the one below that is a measured move down.

Each pattern is composed of three parts: The first leg (12), corrective phase (23), and second leg (34).

Consider the measured move down pattern (the bottom one).

Assume points 1 and 3 are peaks, and 2 is a valley. I measured the retrace of leg 32 as it applies to leg 12. That is (3-2)/(1-2), using the high and low price of the associated turn (high price at 1, low at 2, high at 3).

I discovered that the higher the retrace, the more likely leg 34 would meet or exceed the drop of leg 12. That told me how to find measured moves (1234) that would meet or exceed their measure rule targets (leg 34 should meet or exceed the move of leg 12) by only knowing the first three turns (1, 2, and 3).

I checked the slope of lines 12 and 34 but that didn't help at all. The angle of turn 1, 2, 3 also showed no influence. Only the size of the retrace mattered.

As we'll see, this discovery applies to both measured moves up and down.

Methodology

For tests on the measured move, I used 497 stocks with start dates as early as 2/1980, extending to the current date, May 2018. Not all stocks covered the entire range.

I found over 21,000 qualifying samples (meaning those in a bull market only) for the measured move down. Measured move up had over 31,000 samples.

I limited trades to those at least $3 for the low price of the first turn and excluded any trade which occurred in the 2000 bear market (3/24/2000 to 10/10/2002) and 2008 bear market (10/12/2007 to 3/6/2009).

I found four consecutive reversals (minor highs and minor lows). Then I measured the retrace of the first three turns. In the above picture, that's turns 1, 2, 3 and leg 32 as a percentage of leg 12.

Finally, I measured if leg 34 was as long as leg 12, on a dollar (not percentage) basis.

Top

Results: Measured Move Up

The following table is a frequency distribution of retraces for measured move up chart patterns and how often the leg 34 move met or exceeded leg 12.

Measured Move Up Retrace Percentages versus Measure Rule Success
Hit Target?25%30%35%40%45%50%55%60%65% 70%75%80%85%90%95%100%
Yes0%1%1%3%3%5%6%7%8% 8%9%10%10%10%10%9%
No4%7%8%10%10%10%9%9%8% 6%5%4%3%3%2%1%

I sorted the retrace percentages into twenty bins, but only a portion of them are shown. Let's take the "Yes" row, 25% column. For patterns reaching their measure rule targets, only 60 out of 15,993 patterns, or 0%, of measured move up chart patterns had retraces over 20% but less than or equal to 25%.

At the other end of the row, 9% of measured moves that retraced all of the first leg fell into the 100% retrace bin. In other words, 9% of the patterns retraced the entire first leg and still managed to reach their price targets.

The "No" row means this is a frequency distribution of retraces for those measured move up chart patterns that failed to rise far enough in the second leg (34) to match the first leg (12) move.

The highest number of misses cluster in the 36% to 50% range (at 10% of samples, each).

Compare that to the patterns which reach or exceed their targets (the "Yes" row). They cluster in the high retrace bins: 76% to 95%.

What does this mean? The larger the retrace in a measured move up, the more likely the chart pattern will see the second leg equal or exceed the first leg move.

Top

Results: Measured Move Down

The following table is a frequency distribution of retraces for measured move down chart patterns and how often the leg 34 move exceeded leg 12.

Measured Move Down Retrace Percentages versus Measure Rule Success
Hit Target?25%30%35%40%45%50%55%60%65% 70%75%80%85%90%95%100%
Yes0%0%1%2%3%3%5%6%7% 8%9%11%12%11%12%11%
No3%4%6%8%9%10%9%10%8% 8%7%6%4%3%2%1%

I sorted the retrace percentages into twenty bins, but only a portion of them are shown. Let's take the "Yes" row, 25% column. For patterns reaching their measure rule targets, only 17 out of 11,125 patterns, or 0%, of measured move down chart patterns had retraces over 20% but less than or equal to 25%.

At the other end of the row, 11% of measured moves that retraced all of the first leg fell into the 100% retrace bin. In other words, 11% of the patterns retraced the entire first leg and still managed to reach their price targets.

The "No" row means this is a frequency distribution of retraces for those measured move down chart patterns that failed to drop far enough in the second leg (34) to match the first leg (12) move.

The highest number of misses cluster in the 41% to 60% range (at 9% to 10% of samples, each).

Compare that to the patterns which reach or exceed their targets (the "Yes" row). They cluster in the high retrace bins: 71% to 100%.

What does this mean? The larger the retrace in a measured move down, the more likely the chart pattern will see the second leg equal or exceed the first leg move.

Tell your neighbors...

-- Thomas Bulkowski

Top 

See Also

Written by and copyright © 2005-2018 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners. I'm all for computer dating, but I wouldn't want one to marry my sister.