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Chartered Market Technician Institute

Chartered Market Technician Institute. Point and Figure. Point and Figure Charts Introduction. Very different from Bar & Candle Charts Time is not a factor, the account for price only Terminology Point: refers to the location of the price plot

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Chartered Market Technician Institute

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  1. Chartered Market Technician Institute Point and Figure

  2. Point and Figure Charts Introduction • Very different from Bar & Candle Charts • Time is not a factor, the account for price only • Terminology • Point: refers to the location of the price plot • Figure: the ability to figure target prices from the points • Relatively simple to employ, only prices that meet the “box” and “reversal” size are used • The Chart reflects the High and Low, whenever important, which many feel is a better measure of supply and demand, rather than the open and close, which many feel to be arbitrary times

  3. One Box (Point) Reversal • Price is Plotted on the vertical axis • Time is not scaled • Each square or “box” represents 1 point in the price • Plot is made only when price of box is touched or traded through • Change in plot to a new column is made only when price is trending in one direction and subsequently reverses by the box size or larger • One-step-back method (only in 1-box reversal charts) • Price reverses direction by the value of 1 box only and then reverses back in the previous direction, leaving an X & an O in the same column • See Figure 2-6 & 2-7 (next page) • See page 66 thru 75 for step by step construction

  4. One Box (Point) Reversal

  5. Box Size • Can be expanded or contracted depending on personal preference • The larger the box size, the less noise • The smaller the box size, the greater the detail Multi-Box Reversal • Reversal can be different from box size • 1 Point, 3 Box Reversal the most popular • X: used in columns when price is increasing • O: used in columns when price is decreasing

  6. Time • With the start of a new month, a letter or number is used instead of an “X” or an “O” • Sometimes a year is recorded as well at the bottom • Point size recommendations: • 1pt for prices btwn 20 & 100 • .5pt for prices btwn 5 & 19.50 • .25pt for prices less than 5 • 2pt for prices greater than 100

  7. Figure 11.15

  8. Point and Figure Charts key characteristics • “Box” & “Point” are used interchangeably • P&F does not take into account time or volume • Requires continuous time flow • Analyzes all price action • Disregards inactive period, concentrates on active • Screens out price action that has little predictive ability • S&P500 futures vs S&P500 cash

  9. Old & New Methods • There are 2 variables used to determine Point & Figure Charts • Box or Point size • The number of boxes for a reversal aka “reversal amount” or “reversal size” • Early version was known as one by one • Box and reversal sizes were equal • Patterns were complex and open to interpretation • Accurate as it included all price action • Newer version known as the three point reversal • Did not require as much data flow, can be estimated from daily closes or high/low methodology • Some accuracy lost because intra-day trading ignored • Clarifies as well as it ignores noise • Two types are very different and require different rules and interpretation • Technically 3pt reversal not really point and figure as it does not rely on continuous data

  10. One Box Reversal Point and Figure • No longer very popular • Patterns are not precise and require and experienced analyst to interpret • One advantage: The Count • Anticipating the expected move is done by measuring the width of the observed base • Consolidation/Congestion area of a one box chart • Observation: when price changes occur more frequently at lower level of range, odds favour an upside breakout and vice-versa Box and reversal sizes were equal • Trendlines are drawn in the same manner as with bar charts • Trendline breaks negate earlier observation

  11. Patterns • Point and Figure uses both traditional and unique patterns • Traditional: Head and Shoulders Top • Unique: Semi-catapult and Fulcrum Semi-Catapult • It is a continuation pattern • Characteristics: • There is a preceding trend • A pause or pullback from the trend • Price then breaks through the price extreme of the preceding trend (the catapult point) • Trend resumes (Bullish examples: figures 3-3, page 117. Bearish examples: figures 3-5, page 118) FULCRUM • It is a reversal pattern • Easily recognized • Holds a reliable count as it is contained by distinct walls • Other characteristics • A previous trend entering into a consolidation • Sideways price action near the trend extreme • A “mid-fulcrum” rally of short duration, approximately 15% of the previous trend, should be mistaken as turn in trend (results in a false break or false catapult) • Subsequent re-test of the trend extremes • A “catapult rally” above the mid-fulcrum rally (breakout from which is called a true or full catapult) • Fulcrum variations: • A Compound Fulcrum (2 Fulcrums side-by-side) • Delayed Ending Fulcrum (second Fulcrum lower than the first – ending diagonal triangle?)

  12. See pages 167 to 170 in du Plessis

  13. Steps to establishing a horizontal count on a 1-box chart • Look for a congestion pattern • Methods for measuring the width • Method 1 (best) • The count that has the most filled squares is used, not the longest row • Even blank squares are counted • No exact rules on where to start the count • Generally the longer the consolidation the more difficult to count due to smaller rallies and corrections which make it difficult to establish where the range began • Method 2 (preferred if number of rows with same number of x & o) • Count the width of each row in the pattern, average and round up by 1 • The trigger is taken to be the row in the middle of the pattern • Method 3 (preferred if there are walls) • If the pattern has walls, count across from the start of the right hand wall to and including the left hand wall • Method 4 (prefered if willing to wait for breakout) • Count the width of the pattern at the breakout or catapult point • Either the width between entry and exit walls at the catapult point • Or the width of the pattern one row below the catapult point • Correlation between range and breakout, “The bigger the base, the higher the space” • Project the count up or down • Multiply the column count from step 2 by the box size • Add / Subtract this value from the row the count was taken • Wall: a vertical line marking either side of a consolidation • Count is the most valuable feature of the One Box Chart • Less precise than the 3 box chart counts

  14. Action Points • Ideal Selling and Buying Points as outlined by Alexander Wheelan • When all of the following conditions appear in a one box point and figure chart, the ideal situation exists: • The technical position of the market is favorable • A clear and broad fulcrum appears after an extended trend • The extreme of the fulcrum fulfils the max count from the start of the previous trend • Fulcrum appears against major support or resistance • The catapult coincides with the break of a major trendline • The catapult occurs at a price level with little support or resistance in space following

  15. Three Box Reversal Point and Figure • More popular than one point predecessor • Can be plotted from prices found in the newspaper • Close only method • More popular, only a row of X’s or O’s for the day • High/Low method • Close is ignored completely • Reliance on the trend • as long as extremes are made in the direction of prevailing trend, in accordance with the box size, counter trend extreme is ignored • If no new extreme, opposite extreme is examined for a potential change • See pages 95 to 103 for construction • Requires the knowledge of only a few basic patterns • Academics like it because these patterns can be tested • Can have only X’s or O’s in each column • See pages 80 thru 86 for construction • Due to asymmetry, reversals can be used as trailing stops

  16. The Count in a Three-Point Reversal Chart Less ambiguous and easier than 1 box charts Two Methods: • The Vertical Count • The Horizontal Count • Doesn’t have establishment and activation stages like vertical count • Much price action is lost in the Three Box Reversal, less accurate than the One Box method

  17. The Count in a Three-Point Reversal Chart 1. Vertical Count Calculation method • Choose a completed column of X’s (establishment): • The 1st move off a bottom • The second move off a bottom if it is part of a bottoming pattern • The completion of a mini-top in an uptrend • A second column of X’s if the 1st column is a short column • A significant X column breakout • Count the number of X’s in the column and calculate • Using a completed column, multiply the Xs by the box size and then the reversal size • Add this value to the lowest O in the column to the left of the counting column for your upside target • Unique to the Three point Reversal Method • DO NOT USE THE BOTTOM OF THE PRECEDING PATTERN, USE THE LOW OF THE PRECEDING COLUMN • Activate the count on a break of the counting column • Reinforces the trend

  18. The Count in a Three-Point Reversal Chart 2. Horizontal Count Calculation method • 2 methodologies • Cohen • Sexsmith (less popular) • Prerequisites • A previous trend • A topping or bottoming pattern • A Sideways consolidation • A turn in trend • Congestion Width determines the extent of the move • Cohen Methodology • Look for a congestion pattern after a trend, marked by walls • Count the number of columns across the pattern, including the walls • Multiply by 3 and the box size then add to the value of the lowest O • Establishment and Activation stages are identical • The exit column rises above the highest X in the pattern • Logic of the Horizontal Count: the larger the base, the higher the space

  19. The Count in a Three-Point Reversal Chart 2. Horizontal Count Calculation method • Sexsmith (less popular) • Same logic as the 1 box horizontal method (find row with most filled squares) • Useful for continuation as well as reversal patterns Risk and Reward: • 1st unit of risk below preceding O column (assuming a buy for a 3 box P&F. • For a 1 box its below the count row • 2nd unit of risk below the basing formation (assuming a buy) • Vice versa for a sell • (see page 254 for an example)

  20. Risk/Reward

  21. Pattern characteristics • Sloping bottoms are more bullish • Slopping tops are more bearish • See pages 129 through 133 • Slopping tops and bottoms indicate indecision • The breakout/pullback or breakout/retest • One of the strongest P&F signals, reinforces the 1st breakout • See pages 136-137

  22. Breakout/Re-test

  23. Eight Standard Patterns • Double Top and Double Bottom • Rising Bottom and Declining Top • Triple Top and Triple Bottom • Ascending Triple Top and Descending Triple Bottom • Spread Triple Top and Spread Triple Bottom • Bullish/Bearish Triangle • Above Bullish Resistance/Bearish Support Line • Below Bearish Resistance/Bearish Support Line

  24. Double Top/Double Bottom • Consists of only 3 Columns • Double Top: • Two advancing rows, One descending rows • Double Bottom: • Two descending rows, one advancing rows • Different nomenclature than for bar charts • “Top” designates the breakout point • Bullish Pattern • Signal occurs when the 3rd Column breaks above the 1st column • All other standard formations except lines have Double Tops or Double Bottoms embedded within • Davis found that 80.3% of Double Tops are profitable

  25. Figure 16.11

  26. Rising Bottoms & Declining Tops • Variation on Double Tops and Bottoms • Four Column pattern • Rising Bottom: • First column of O’s must be below the more recent column • Usually the 1st column of lows declines from a much higher level than shown • One possible variation is for the prior of X’s to be stronger • Declining Top is exact opposite • Davis found that 80.4% of Rising Bottoms are profitable

  27. Figure 16.12

  28. Triple Top and Triple Bottoms • Triple Top occurs when prices break above two prior highs, vice-versa for a Triple Bottom • Five Column pattern • Provides greater confirmation of a change in trend • Tends to be more profitable than a Double Top • Davis found that 87.9% of Triple Tops are profitable, 93% of Triple Bottoms

  29. Figure 16.13

  30. Ascending Triple Tops, Descending Triple Bottom • Varieties of the Triple Top/Triple Bottom • Triple Top: • Three rising columns, with the second rising column pushing to new highs • Two Separate Double Tops • Denotes a strong uptrend • Opposite for a Descending Triple Bottom • Davis found that 79.5% of Ascending Triple Tops are profitable, 83.3% of Triple Bottoms

  31. Figure 16.14

  32. Spreading Triple Tops & Bottoms • More complicated varieties of the Triple Top/Triple Bottom • Fairly infrequent occurrence • Requires at least six columns • Similar to the Fulcrum as it represents a congestion zone followed by a false breakout and then renewed congestion • Requires three separate tops with one or more lesser tops between the major ones • Breakout must rise above all tops • Triple Top: • Three rising columns, with the second rising column pushing to new highs • Opposite for a Spreading Triple Bottom • Davis found that 85.7% of Spreading Triple Tops are profitable, 86.5% of Triple Bottoms

  33. Figure 16.15

  34. Triangles • Very rare in Three Box Reversal Land • Only larger than normal Triangles captured • Davis found poor results: 71.4% of Bullish Triangles are profitable, 87.5% Bearish Triangles were profitable *only looked at continuation patterns*

  35. Trendlines • Drawn at 45 degree angles for multi-box reversal, subjectively for 1x1 • If price can’t maintain a rise of at least the value of 1 box every time it makes a reversal, it can no longer be considered a bull trend • Bullish Support Line • Drawn from one box below the last observable column (always an O column) • Bearish Resistance Line • exact opposite • General Rules: • One should never buy unless price is greater than trendline support • One should never sell unless price is less than trendline resistance • Trendline breaks only valid if they coincide with a pattern break as well

  36. Figure 16.8 in Kirkpatrick andDahlquist See pages 180 through 183 in du Plessis

  37. Rising and Declining Trendlines • In a rising trend, a trendline is drawn at a 45 degree angle from the bottom • A subsequent parallel line is drawn off of the earliest peak in that trend • Two ways for the lines to give way • A break of support – aka “Bullish Reversal Pattern” • Indicates a major turn in trend • Upward Break through bullish resistance • Indicates upward acceleration at the end of a strong move • Break of support should have more validity • Declining Trendlines seen as the exact opposite of Rising Trendlines • Break of trendline resistance aka “Bearish Reversal Pattern”

  38. Figure 16.17 & 16.18

  39. Other Patterns • Three other patterns of note: • Catapult • Spike aka “Long Tail” • Shakeout • Catapult • A confirming pattern • Results in a pullback or throwback following the breakout from a Triple Top or Triple Bottom • Combination of a Double and Triple Top • Powerful Pattern which allows for favourable entry • Buy 50% on a pullback, stops below the base of the formation, add on a move to new extremes

  40. Figure 16.19

  41. Other Patterns - continued • Spike aka “Long Tail” • A reversal in trend following a trend acceleration • How does one define a an acceleration worth of fading? • Most practitioners 17-20 • (Blumenthal argued 20 boxes, Burke 17-20, Dorsey 20 boxes) • Buy on a confirmed reversal

  42. Figure 16.20

  43. Other Patterns - continued • Shakeout • Capitalizes on traders and investors who sell on the first sign of difficulty following an uptrend • Criteria: • Strong uptrend • A Double Bottom formed by 2 columns of O’s • A breakdown through the Double Bottom • Must occur early in a strong uptrend • Buy the reversal • Additional Rules: • The market in question must be in an uptrend • The market should be above bullish support line • The stock must form two tops at the same price • The reversal from these tops gives a Double Bottom sell signal • The sell signal is the first that has occurred • Must be showing positive relative strength or be in an uptrend

  44. Figure 16.21

  45. Traps • A pattern completes as expected, but then reverses and breaks out to the other side • Bull Trap • Bear Trap • See page 146 for real life examples in the FTSE

  46. Chapter 6 – Point and Figure Charts of Indicators • Advantage of P&F charts on oscillators is to act as a filter • Not as useful for indicators that have been smoothed • Most useful on three types of indicators • Relative Strength which shows trend of relative outperformance • Scaling is irrelevant, • P&F allows for objective trend definition using the 45 degree trendline • Should use log scale 1% boxes • Cumulative lines like On Balance Volume • Values are arbitrary • Identifies the trend in OBV through 45 degree lines • Clarifies areas of accumulation and distribution • Use arithmetic box which is 1% of OBV range • Oscillators like RSI and Momentum • Gives cleaner signals and acts as a filter for trend determination • 45 degree lines

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