ValuePickr Forum

Point & Figure Charting

Can you believe that Point and Figure Charting has been around for over a 100 years? The first proponent of this was Charles Dow the first editor of The Wall Street Journal.

Point and Figure Charting is based on the simple economic theory of Demand and Supply. When there is more demand the price rises and when there is more supply the price falls. The same principles and logic apply to Capital Markets. When there are more buyers the price rises and vice versa.

Point and Figure Charting is done on a simple graph paper. There are two columns: 1) The “X” column which represents buyers and Y column represented by “O”.

Here is a link which gives you Point and Figure Charts

http://chartink.com/pandf.php?name=nifty

The numbers 1,2,3 to 9 January to September months and A,B,C represent October, November and December.

I will go into the details of this in my next write up. Till then await your feed back.

A special thanks to Hitesh for encouraging me to start this new thread. Will also share the link to a book on Point and Figures by Thomas Dorsey available on google books.

Tony Castelino

“O” sellers

http://chartink.com/pandf.php?name=nifty Link: http://chartink.com/pandf.php?name=nifty

represent

saw the nifty chart but dont know how to interpret the chart. u can give a brief introduction of how this method works and take it from there.

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Dear Hitesh,

I am attaching the basics of Point and Figure to this message. This has been taken from Dorsey Wright and Associates.

Hope you will pick up the nuances as the same is very simple and easy to understand. If clarifications are required I will be delighted to be of assistance to anyone who is interested.

Tony

Lesson1.docx (39.9 KB)

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Dear Hitesh,

I had been out of town and hence could not give updates. Instead of giving updates lesson by lesson I thought it fit to give the link to the book itself so my fellow readers can make best use of it.

The link for the book is here:

http://books.google.co.in/books?id=xAKWdFB8cS4C&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false

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It seems a lot of the readers are interested in Point and Figure charting, hence i have decided to write small articles which will help them in understanding the technical analysis in a simple and lucid language. Let me get your feed back.

Dear Tony if you write, it will immensely help us

Regards

Mallikarjun

Yes! I have decided to write and helped all of you who are interested in Point And Figure Charting. However, my request to you is that to better understand what I write, it will be advisable to read pages 29 to 39 of the book which explains the basics of charting. This will make your job easier too. Get a firm grip of the basics and I am sure you all will be able to master the art of technical analysis.

This art has helped me a lot. Now I know when to enter a stock and when to exit. Earlier, i used to enter the stock at the highest and sell at its lowest. Poor stock investing basics. With this art I have improved my performance and looking forward to fine tune it in the near future.

A warning though! Nothing comes easy. It needs total dedication. Half baked knowledge is dangerous they say.

Thank you all for asking me the book on Point and Figure. By sharing knowledge one can only gain more knowledge.

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Good initiative Tony.

Looking for your posts.

Tony,

Apart from the point and figure chart, what other parameters you consider to validate the trend or buy/sell signal ? In one of the other technical posts you have been also mentioning about RSI, EMA as references.

Hi Praneet,

Have you read the book on Point and Figure charting, if not, please take it as a starting point. As I said earlier, half baked knowledge is dangerous. Even if I spell out the other parameters, you may not understand them. However, i will try my best to explain some in brief as I will be going into details at a later stage.

First of all one has to check the MARKET. If the markets are weak the stock too will be weak, but this will give you an opportunity to buy strong stocks.

Second is the SECTOR to which the stock belongs. I do an analysis of the sector too and will be putting the detailed analysis for all.

Third is the RELATIVE STRENGTH of the stock, i.e price of stock divided by market index value, e.g. Nifty index or BSE Sensex Index.

Fourth is PEER RELATIVE STRENGTH, i.e price of stock divided by the sector index value.

There are more parameters, but i would not like to scare you at this stage. Will surely do my best to give a detailed analysis of how things are to be done.

Thank for the response Tony. Yes, I do have started going through the book and have got a idea about evaluating relative strength of a stock vs market/sector/peers.

On chartink, we can look for P&F charts of a stock but any idea where can we check relative strength for comparison? Do you use any particular software or maintain any excel sheet?

Till now, I personally feel that P&F methodology suits good for short/long term investing and have started to paper trade to get a clear picture and your inputs will help me to gain further experience.

Great work Praneet! Keep at it and you will succeed. As for relative strength you have to maintain excel sheet.

Hope you are keeping charts in a graph book. This will give you hands on experience. It does not take time to update a chart, but the visual effect stays in your memory. A picture speaks a thousand words they say.

THE UNDERLYING PHILOSOPHY OF POINT AND FIGURE CHARTS:

The basic premise of Point and Figure charts is that there are two factors at play in the market. One is demand, represented by a column of “X” and supply represented by a column of “O”. We all know that when demand exceeds supply the price rises and when supply exceeds demand prices fall.

Long columns of “X” represent greater demand and therefore rising prices.

Long columns of “O” represent greater supply and therefore falling prices.

Shorter columns of alternating columns of X’s and O’s represents a fight for supremacy between demand and supply.

I will not go into the details of drawing of charts, however anyone wanting clarifications on the same can always write to me.

Let us understand a Simple BUY and a Simple SELL.

A simple buy signal happens when a double top has been made. So you will ask me what is a double top.

Illustration chart:

http://chartink.com/pandf.php?name=nifty

Here I have taken the chart of Nifty for the purpose of understanding double top. Look at the chart to the extreme right. At 5750 Nifty made a double top. A double top are two adjacent X’s without anything in between. From (B) i.e month of November the nifty rose from 5650 to 5750 to make one part of the top. Then it moved four boxes down to touch 5550 and thereafter once again touched 5750, where it made a double top. When an X exceeds a double top by one box it gives a buy signal. In our case the Nifty gave a buy signal at 5800. And it also made another double top at 5800.

One can see how strong the Nifty turned thereafter to touch 6100 a new high for the markets. It is only in the month of February 2013 that the Nifty has once again entered in the O column reflected by more sellers than buyers.

Hope this is clear to all of you. For your assignment and practice at home try to read more charts showing double tops and buy signals.

Next time I will write to you on double bottom and sell signals.

Col 1 Col 2 Col 3 Col 4 Col 5
800 X
700 X X
600 X O X
500 X O X
400 O

A DOUBLE TOP is made at 700 and a buy signal is generated at 800 when the current column of X rose by one box from 700 to 800 to give a buy signal.

BUY SIGNAL:

I hope all of you have understood a buy signal and a double top too. As i have not received any clarifications I will take the topic of buy and double top a little further before i can start explaining a double bottom and a sell signal.

A stock continues to remain in the buy signal irrespective of the change of column from X to O till a sell signal is generated. An example will help in understanding this statement.

Col 1 Col 2 Col 3 Col 4 Col 5
800
X
700 X X O
600 X O X O
500 X O X O
400 O O

From the above chart we can now read the following:

The stock met resistance at 800 and the number of sellers exceeded the buyers. The stock reversed once again from column X to column O. However, the stock is still in the buy signal. One may ask how?

As long as the stock has not generated a sell signal, it continues to be a buy. The stock has made a double bottom at 400 and if it falls further to 300, then and then only it will generate a sell signal.One should remember that when you are in the X column, the buyers exceed the sellers and hence you are in the stronger team (if you are a buyer). If the stock is in the O column it means that the sellers are more than the buyers and hence you are in the weaker team (if you are a buyer). One should avoid buying a stock when it is in the O column and wait for a change to column X.

Looking forward to you queries if any and feedback. Do write in, as it will enable me to know if all are understanding what I am explaining.

Hi Tony,

Nice effort.

As an assignment, I tried to search for the buy signals given by NIFTY in past and their success rate in predicting the future.I have marked the “buy” signals in the attached chart.

Here I find that NIFTY had given “buy” signal 11 times in the period of consideration. Out of them, 7 times it had predicted correctly, while 4 times it failed.

Could you discuss the same please.


Hello Manish,

You have done a great job! Good analysis and keep it up.

From the chart one can see that the market has given correct BUY and SELL signals. You will see the importance of BULLISH SUPPORT LINES (BLUE) AND BEARISH RESISTANCE LINES (RED).

Let us analyse it year by year:

2011

In 2011, markets broke out at 5650 and reached a new high of 5900. There it met with resistance and then subsequently broke down to 5700. It attempted 5900 three times (triple top) which was hard to crack. This was a sign that 5900 was a very strong resistance. At 5900 there was tremendous selling pressure every time which brought the market right down to 5700. When it gave a sell signal at 5650, a clever investor would have exited his positions. From that time onward the market started making lower tops and lower bottoms. This is a bearish sign. From 5900 the tops started falling to 5700 and then 5150 and 5000.

2012

The lowest top was made at 4800 in 2012 from where the markets again started rallying. One can clearly see that the top of 4800 in 2012 from which the markets rallied, became the support for the market in May and June 2012. It made the lowest bottom at 4800 and from that point it started making higher tops at 5000, 5300, 5400, 5800 and then 6100 in year 2013.

One has to learn the importance of Bullish Support Line too. In 2011 when the market broke the bullish support line at 5550 it started cracking and went down all the way to 4750.

Similarly in 2012 when the markets crossed the Bearish Resistance Line at 5250 in the month of July and August, the markets started trending upwards and touched 6100.

Today the markets have a support at 5800. This will be crucial. Once it breaks this support then the markets can touch 5750 and then 5550.

If you see these levels, they have been touched in the past too as mentioned above.

Hope my explanation meets your requirements.

Tony,

Yes your analysis makes a lot of sense.

Looking forward to next lessons.

Hi Tony,

How did you reach conclusion that the NIFTY Support is 5800. I could not find any BEARISH RESISTANCE(Red Color) line in the P&F chart for NIFTY.