Analyzing Supply and Demand Using Point and Figure Charts
One of the basic principles of economics is the law of supply and demand. It states that when there are more buyers than there are sellers of a given good, the price should rise. Likewise, when there are more sellers than buyers, the price should fall. In this technical analysis article, we focus on a type of chart that attempts to capture the battle between supply and demand: the point and figure chart.
Point and figure charts have been in use for over 100 years, yet they exist in relative obscurity compared to bar charts and candlesticks. Their usefulness lies in their ability to filter out market “noise”—short-term price fluctuations that occur during longer, more established trends. They differ from the more conventional charts in that they ignore the passage of time and do not take trading volume into account—they are only affected by price movements.
Figure 1 is an example of a point and figure chart for Cisco Systems, which covers daily price movements for the period from January 4, 1999, through April 31, 1999. Immediately, you should see some significant differences from other charts. First, the chart is made up of columns of X’s and O’s. X’s represent rising prices while O’s represent falling prices. Put another way, X’s represent demand and O’s supply. The movement from columns of X’s to O’s and back again creates patterns that you may use to make buy and sell decisions.
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