Equidistant Channel
Now we’re going to switch from reversal patterns to continuation patterns. Using a measured objective in combination with an equidistant channel break can be a powerful combination.
With the exception of the wedge pattern, which we will discuss next, the equidistant channel is my favorite pattern to trade. This is partly due to the fact that they occur quite often and partly because they come with a measured objective that is more accurate than not.
Here’s how to calculate the measured objective for an equidistant channel.
The key to calculating a measured objective for an equidistant channel is to use the entire move up or down as the measured move.
Notice how the first and second move down in the image above are colored black. That black line represents 400 pips and overlaps part of the channel pattern.
So just remember to include the entire move into the channel as part of the measurement. The same goes for calculating the objective on the other side of the pattern.
Wedge Pattern
Last but not least we have the wedge pattern. This is my favorite pattern to trade with the equidistant channel coming in at a close second. Wedge patterns are best traded on the four hour time frame and higher and actually occur quite often once you train your eyes what to look for.
Although most often seen as a continuation pattern, wedges can also trigger reversals. However, it doesn’t really matter whether a wedge is a continuation pattern or a reversal pattern as we don’t commit to a position until the market breaks support or resistance
To find the measured objective for a wedge pattern, you simply take the height of the pattern in pips and project that same distance to a future point in the market.
The illustration above shows how to calculate the measured objective for a wedge pattern. The height of the pattern is measured from the first touch on either side of the wedge. Once you have that figure, in this case, 400 pips, you extend that same 400 pips to a future point in the market in either direction.
In order to get an accurate measurement, it’s important to wait for the market to break support or resistance. This is because the measured move begins as soon as the market breaks out from the wedge.
Don't Forget About Key Support and Resistance
No measured objective is complete without combining it with a key level of support or resistance. In fact, I will often put a key level ahead of a measured objective when determining an area to take profits. This is because, depending on how significant the level is, it will often “outweigh” a measured objective in terms of where the market is likely to reverse.
So if the measured objective for a pattern is 400 pips away, yet a key price action level is just 350 pips away, always aim for the key level first. It’s better to be conservative and book 350 pips of profit than to try and squeeze an extra 50 pips out of a trade and run the risk of making nothing.
Measured Objectives Aren't Flawless
Like everything when it comes to trading, there are no guarantees and no strategy or technique is without flaw. Using measured objectives to identify profit targets is no exception.
Although measured objectives are typically quite accurate, there will be times where the numbers don’t match up. For this reason, you should think of a measured objective as a gauge of how far a market could move rather than a determination of how far a market will move.
Your Turn
Do you currently use measured objectives as part of your trading plan? If not, do you think you will start using them having read this lesson?
Leave your comment or question below. I look forward to hearing from you.