Measuring Principle – Definition

Cite this article as:"Measuring Principle – Definition," in The Business Professor, updated April 7, 2020, last accessed May 26, 2020, https://thebusinessprofessor.com/lesson/measuring-principle-definition/.

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Measuring Principle (Stock Price)

The measuring principle is an indicator that pinpoints the minimum price of varying financial securities for traders. This principle is a mathematical technique using the technical analysis of historical stock patterns to state if there will be an upward or downward movement of the stock price. It assists traders to identify the upward movement as an opportunity to sell while the downward movement as an opportunity to buy. Though not proven to be accurate, the measuring principle is seen as a reliable means in identifying price directions and likewise, varying security opportunities.

A Little More on What is the Measuring Principle

The measuring principle identifies the historical price of financial security so as to predict its future trends. This is a technical analysis that is clearly feasible with properly defined chart patterns, such as a head-and-shoulders formation, a rectangle or triangle pattern and other historical charting formations. The measuring principle differs from the fundamental analysis which predicts directions through the visible economic and market indicators. Investors or other analysts evaluate the stock chart pattern against the other to pinpoint the future directions using the measuring principle so as to predict a reliable direction. However,  if the stock price takes a different direction from the expected direction which the principle indicated, the trader must be proactive by buying or selling the financial security held.

  • The measuring principle is not a proven principle for identifying the lowest security price target for traders.
  •  Measuring principle allows traders to identify a stock’s price movement by evaluating chart patterns movement against each other
  • This principle is clearly feasible with properly defined chart patterns.

Trading Using Measuring Principle

The measuring principle guides trading behavior. Principles, on the other hand, are instructive and might not be accounted for in the mathematical sense. Traders or investors deploy the fundamental and technical analysis to check for the price movement of the specified financial security. Both technical and fundamental analysis are methods of predicting movements in the stock market. Technical analysis uses other indicators apart from the chart patterns to clearly pinpoint the price movement. These other indicators include analyzing moving averages, oscillators, Bollinger bands and support, resistance levels and others. Technical analysis principle revolves around the basis that prices have a directional movement in which the current price always reflects the needed information about the price.

In summary, the basis of the measuring principle is setting a specific minimum price target for trading stocks. And this is done by analysing different technical charts as mentioned above. Charts clearly describe the movement of a stock in two different patterns, they are the continuation and the reversal pattern.

Real World Example

The measuring principle is used to identify the lowest target in which the stock price will move. This is done by pinpointing the highest point of the movement. To calculate this,  the peak of the pattern from the support level is subtracted from the resulting figure. If the investors are looking for a breakout to the top, they would add that resulting figure to the resistance level.

To confirm if the measuring principle is reliable or not, investors would check if the context of the overall technical analysis is quite related to the given movement. This is done because the Measuring Principle is not mathematically proven to calculate the exact movement.

For example, if a company’s stock displays a topping pattern with a peak of $100 and support at $90 then the measuring principle of the company would be ($100 – $90 = $10) and ($90 – $10 = $80). If the trend line is at $85, then the measuring principle in this context is logical. Further validation of the $80 price can come if the lower Bollinger band were around $75.

References for “Measuring Principle

https://www.investopedia.com/terms/m/measuring-principle.asp

https://investinganswers.com/dictionary/m/measuring-principle

https://www.nasdaq.com/…/principles-of-technical-analysis-the-head-and-shoulders-pa…

https://www.stocksignals.ph/…/rectangle-formation-classical-technical-analysis-pattern/

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