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Technical Analysis · Pro · 5 min

Pattern targets and their limits

You can calculate a measured-move target, explain why targets are often not reached and use them as rough guides inside a risk plan.

Precise-looking targets

Pattern targets look scientific. A double bottom breaks out, and a few minutes later someone posts the target: 61.04. Two decimals, a clear line on the chart.

The precision is mostly decoration. The method behind the number is a rule of thumb from textbooks written decades ago. This lesson explains how it works, why the target is often missed, and how to use it without being misled.

Height, projected

The most common target method is the measured move: take the height of a pattern and project it from the breakout point in the direction of the break.

Candle chart A double bottom with lows at 51.68 and 51.86 and a peak between them at 56.36. The price closes above the peak on candle 25. The measured target is 61.04, but the rise stops at 58.60 and the price drifts back to 57.20. Low 1 Low 2 Target 61 Neckline

In the fictional double bottom, the lows are at 51.68 and 51.86, and the peak between them is at 56.36. The height is about 4.68. Added to the breakout level at 56.36, the target is 61.04.

Why are targets often missed? The method assumes that a pattern's size says something about the size of the move after it. That is plausible, but nothing guarantees it. Moves after breakouts run into other levels, news, changing sentiment and ordinary randomness.

The research on chart patterns gives a sober picture. Lo, Mamaysky and Wang, testing patterns on US stocks from 1962 to 1996 with an objective algorithm, found that several patterns provided incremental information. Chang and Osler found a head and shoulders rule profitable on exchange rates, but dominated by simpler rules. Park and Irwin's review warns that many positive results in technical analysis suffer from data snooping and choosing rules after the fact. None of these studies supports treating a measured target as a likely outcome.

Half of the target

Follow the fictional chart after the breakout.

A trader with a plan used the target to check the trade before entering. Buying at 57.00 with a stop below the second low, near 51.80, risks 5.20 for a possible 4.04 to the target: less reward than risk. A stop just below the neckline, near 56.00, risks 1.00 for the same 4.04, but is easier to hit. A trader who waited for 61 regardless watched a gain of about 1.60 shrink. A trader who took partial profits or trailed a stop kept part of it.

Common mistakes

The takeaway

Measured moves project a pattern's height from the breakout. They're rough guides, often missed.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

  1. 1Tap the candle where the rise after the breakout ran out, well short of the target.

    Tap the chart.

    Candle chart Chart for the question: Tap the candle where the rise after the breakout ran out, well short of the target. Target 61 Neckline

    Candle 29 reached 58.60, about half of the measured move. The target at 61.04 was not reached on this chart.

  2. 2A double bottom has lows near 51.70 and a peak at 56.36. What is the measured target after a breakout?

    56.36 − 51.68 = 4.68. Added to the breakout level 56.36, that gives 61.04.

  3. 3How should a measured target be used?

    Targets help to judge whether the possible reward justifies the risk. They are not promises.

  4. 4What do studies of chart patterns generally find?

    Lo and colleagues found some incremental information; Chang and Osler found simpler rules did better; reviews warn about data snooping.

of 4 correct.

Sources

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