Posted in Finance, Accounting and Economics Terms, Total Reads: 390
Definition: Measuring Principle
It is a principle in technical analysis which helps in estimating minimum price targets for traders. This price target is arrived at by analysing the past stock trends. These price targets are such that if they are broken, there is a high probability that the stock price can go down. Hence, it helps the stock traders in coming up with price targets by analysing the stock charts movements.
This works with many defined patterns such as Triangle, Rectangle, Head and Shoulders, Cup and Handle etc.
For example, consider an S&P chart which has a potential of forming a topping pattern in 3 months having peak at 855 and a support at 805. If support level is breached, it can form a top in the form of head and shoulders pattern.
Peak = 855
Support = 815
Difference = 40
Thus the height has been determined. Now subtract this height from the broken support level or add it when the stock breaks out from the resistance. Thus is the break is below support, it is to be subtracted.
Breakout level = 815
Height = 40
Minimum target = 775
Thus the target level is determined in this manner.
Though there is no theoretical backing or a mathematical proof for such a strategy, historically it has been found to be quite accurate. So if the stock trends move in direction that is violating this principle it should be taken care of by the trader immediately.