A Time-Honored Approach to Charting: Point & Figure Analysis
One of the most interesting and instructive methods of charting is point and figure. In fact, point and figure is one of the oldest methods of keeping track of price changes, developing long before conventional charting methodology, certainly long before the many gimmicks marketed today. Yet, as readers will see for themselves, the strength in point and figure is in its simplicity, in its ability to get down to the “bottom line.”
The main characteristic of point and figure is that only prices are tracked; time does not play a part, unlike most charting techniques.
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In point and figure, an advancing price is shown by an “X,” and a declining price is shown by an “O.” As long as the stock price continues in the same direction, Xs and Os are entered in the same column; new columns are started only when price changes direction. The result is a series of X and O columns.
As a comparison, Figure 1 presents the typical bar chart for Kmart, where price is plotted along the y-axis and time along the x-axis. Figure 2 shows the point-and-figure chart for Kmart over the same time period, where only price is plotted.
In order to establish what price changes constitute an “X” or an “O,” certain assumptions must be made. For instance, on a $100 stock, a move up of ¼ point does not seem significant, while a 2-point move may be. On the other hand, as we’ll see, a ¼-point move may be highly significant on a lower-priced stock.
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