The
Stock Trading Advisor: Why I use Point & Figure Charting
Someone recently
ask me why I use Point & Figure Charting over all of the other forms of
technical analysis. I think you can boil it down to just a few salient
points: simplicity and it works for the type of trading and investing
that I do.
Point & Figure (P&F)
charting is a method of technical analysis that has been in use for more
than 100 years. After a number of years on the shelf it’s once again
gaining in popularity. It’s probably one of the most unique charting
systems that you’ll ever encounter.
At first glance, a
P&F chart looks like a real mess. “Gibberish” is a good word that comes
to mind. How in the world can anyone make sense out of all of those “Xs”
and “Os”?
I know the first
time I looked at a P&F chart I couldn’t make heads or tails out of it.
To say that I was confused was an understatement. After 30 minutes or so
of study, I was hooked. And you will be too!
A P&F chart is
nothing more than a picture of supply and demand. Think back to
Economics 101. What’s the first thing that we all learned? Supply and
Demand must be equal.
When demand for
something is greater than the existing supply, prices rise. On our chart
rising prices are represented by a column of Xs.
When the supply of a
particular item is greater than the demand for it, prices fall. On our
chart falling prices are represented by a column of Os.
The chart is put
together using alternating columns of Xs and Os. This is just the ebb
and flow of supply and demand.
Probably the most
unique feature of the chart is how time is depicted. It isn’t. Time is
not a factor when it comes to supply and demand. The direction changes
when it changes.
Simplicity is the
essence and beauty of P&F charting.
P& F charting offers
a trader/investor several advantages:
1. Support and
resistance levels are easily recognized
2. Trend lines are a
virtual no-brainer. What is “is”
3. Chart patterns
are easy to interpret
4. No noise. To me,
this is one of the most important advantages. Insignificant price
movements have been eliminated. On a bar or candlestick chart,
irrelevant prices movements clog up the chart and this “noise” can lead
to a misinterpretation of the chart.
5. I like to post my
charts by hand because it gives me a better “feel” for what is going on
in the market. Because of the type of charting that I am doing, P&F
charting allows me to follow a large number of stocks, sectors and
indices.
At the end of the
day, you have to be comfortable with the system you are using. I’ve been
a P&F guy for about 30 years. Simple and Reliable – it doesn’t get much
better than that.
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