Classic Techniques  |  OCT 1997

Measuring the Move by Michael Kahn

Chartists often use techniques to set profit objectives as well as determine their risk points in putting on a trade. Here, then, are some guidelines for your own trading. When a market breaks out of a technical trading pattern, traders need to correctly gauge potential price moves against the risk of being wrong. Most patterns reveal the market’s intentions in their own shapes and sizes. Two, and sometimes three, price targets can be forecast with a simple assessment of the pattern itself. Measuring potential price moves works for all patterns and all time frames, thus aiding traders in their pursuit of profit. But first, we need to review the basics of supportÝ and resistanceÝ. Simply stated, support and resistance are price levels at which prices stop going down or up, respectively. A price in any market is one that buyers and sellers have agreed is fair value. If more buyers think that price is fair, they will attempt to buy. This, in turn, raises demand, and so prices rise. As prices rise, buyers become less active while sellers become more active. At some point, buyer and seller activity will balance, and this price level becomes resistance. The more times a market touches a level of resistance (or support), the more significant that level will become because buyers and sellers do not perceive fair value to be any higher (or lower) than that level. The market will have difficulty in rising (or falling) any further unless something occurs that causes perceived fair value to change.

by Michael Kahn