http://aiqsystems.com/docs/ref_6.pdf
Chapter I: Technical Indicators Explained
101
Point and Figure (PtFig)
Point and Figure charting, one of the earliest charting methods used
by stock traders, is based on the concept that chart patterns are the
result of supply and demand on the price of an equity. The patterns
seen on Point and Figure charts are used by analysts to spot opportune
buy and sell points and, in some cases, to project the extent of the
ensuing advance or decline.
Point and Figure charts differ from other commonly used charts in
that the horizontal axis does not represent time. Some describe the
P&F chart as one dimensional since both the vertical axis and the
horizontal axis are related only to price. Although chronological
information is of no importance either to the construction of the P&F
chart or to its interpretation, the AIQ Point and Figure charts provide
dates on the horizontal axis to help the user establish a frame of
reference.
Price is plotted as a series of vertical columns. The columns
represent alternating up and down trends with uptrends shown as
columns of X.s and downtrends as columns of O.s (See example
chart). The vertical axis of the chart simply represents price in the
usual way. However, the horizontal axis depicts changes in the
direction of price with each new column constituting a reversal in
price of some specified amount.
Important
When performing Point and
Figure charting, place your
mouse cursor on the Point
and Figure plot and press the
Z key so that the plot fills the
entire chart window.
Pressing the Z key again
restores the plot to its original
size.
Point & Figure chart displaying
3 plus years of price action
Note
Point and Figure charting is
not available for real-time
charts.
102
Technical Indicators Reference Manual
The two determining factors in the construction of a P&F chart are:
1. The increment of price that is equivalent to the height of one X or
O. This factor, called the
Box Size, determines the minimum price
increase needed to add another X to a column of X.s, or the
minimum price decrease needed to add another O to a column of
O.s.
2. The minimum increment of price reversal required for a new
column. This factor, called
Reversal, is specified in terms of the
Box Size
. If Reversal is set to 3, price would need to move in the
opposite direction (i.e., reverse) by an amount equal to three times
the
Box Size in order to start a new column. This entry also defines
the minimum number of X.s or O.s that can appear in one column.
Since price reversals less than the specified minimum are eliminated,
P&F charts can be constructed to depict only significant price moves.
However, the smaller the reversal increment (combination of
Box Size
and
Reversal), the greater the number of price reversals (columns)
that will be seen. Also, the smaller the
Box Size, the greater the
number of X.s and O.s that will appear in each column. Therefore,
to display a meaningful P&F chart, it is essential that appropriate
values be entered for
Box Size and Reversal.
Point and Figure settings
Box Size Setting
Box size is an important parameter in the construction of a Point and
Figure chart. If the box size is too large, the chart will consist of so
few columns and boxes that it will be meaningless. If the box size is
too small, the number of columns and boxes will be unnecessarily
large and analysis of the chart will be difficult.
The
Change Indicator Constants dialog box simplifies the
determination of the appropriate Point and Figure box size. Although
you can enter the box size directly, you are not required to do so.
Instead, you can simply select the appropriate price range and the box
size is automatically determined for you. The dialog box (see next
page) provides a list of price ranges from which you can easily select
the range that best matches the range of the charted security. Seven
selections representing seven different price ranges are available (see
table next page).
When you display a Point and Figure chart and find that the box size
needs to be changed (too few or too many columns and boxes), you
Note
The name
Box Size is taken
from the rectangular
coordinate graph paper on
which P&F charts were
originally plotted. In hand
plotting, the X.s and O.s are
entered in the equally sized
squares or
boxes that are
printed on the graph paper.
Note
To accommodate low priced
stocks,
Box Size is entered in
eighths of a point on the AIQ
charts. For example, the
default value for
Box Size is
8, which is equivalent to a
price increment of one point
(8 x 1/8 = 1).
Chapter I: Technical Indicators Explained
103
can use
Change Indicator Constants to adjust the box size. The price
ranges available in the
Constants list box are as follows:
Price Range Box Size Box Size
$ 1/8 point points
0-5 2 1/4
5-20 5 5/8
20-100 8 1
100-500 32 4
500-2004 128 16
2004-5012 256 32
5012+ 512 64
Reversal Setting
Three is the most commonly used
Reversal number. Since Reversal
is expressed in
Box Sizes, a Reversal number of three means that a
new column is created in the event of a reverse price move of at least
three
Box Sizes in magnitude. The smaller the Reversal number, the
more columns that will appear on the chart. In situations where you
may want to expand the number of columns, you may need to reduce
the Reversal number to as little as one (i.e., one
Box Size).
Months Setting
The Months setting is used to set the amount of historic data that will
be used in constructing the P&F chart. For long-term analysis, Point
and Figure charts can encompass up to ten years of data.
å
To change Point and Figure settings, do as follows:
1. Display the
Change Indicator Constants dialog box by double
clicking the
PtFig indicator in the Control Panel. The Point and
Figure indicator will be selected.
Change Indicator Constants dialog
box for Point & Figure indicator
104
Technical Indicators Reference Manual
2. To change the box size:
. In the
Constants list box, select the appropriate price range
for the security you are charting.
. The box size corresponding to the selected price range will
appear in the
Value text box. For compatibility with lower
priced stocks, Box Size is shown in 1/8 point increments.
. You can make further adjustments to the Box Size by
increasing or decreasing the Box Size shown in the
Value
text box.
3. To change the reversal setting:
. From the
Constants list box, select Reversal.
. Enter a new Reversal number. The available range is 1 to
100 and the default value is 3.
4. To change the months setting:
. From the
Constants list box, select Months.
. Enter the number of months you want the Point and Figure
chart to display. The available range is 1 to 120 and the
default value is 24.
5. Click
OK to accept the new settings.
Analysis of Point and Figure charts
The most important aspect of P&F charts are the patterns formed by
the columns of X.s and O.s. Many years of testing have shown that
P&F chart patterns can identify, with a high degree of reliability,
good buying and selling opportunities.
The Point and Figure chart can be described as a picture of the
contest between the forces of supply and demand. The long vertical
columns of X.s and O.s represent periods when supply and demand
are not in balance. A column of X.s leading upward indicates that
demand exceeds supply while a column of O.s leading downward
indicates exactly the opposite.
When these vertical columns are interrupted by short alternating
columns of X.s and O.s, supply and demand are battling to see which
will overcome and determine the next direction of the stock. It is this
latter price action, the sideways movement, that is of the greatest
significance. The type of pattern made during such periods is what
tells us whether the next move will be up or down.
Note
Point and Figure charting can
be accomplished only on
weekly charts for mutual
funds.
Note
The default value for the
Reversal
setting is 3. The
default
Months setting is 24.
Chapter I: Technical Indicators Explained
105
Point and Figure chart formations
A complete review of all of the P&F chart formations is beyond the
scope of this manual. The following discussion will cover some of
the simpler and more common formations.
Double Top and Double Bottom formations
These two basic formations consist of only three vertical columns.
All other chart formations are made up of combinations of these two
basic patterns.
Since all other P&F formations are derived from these two basic
patterns, other more complex formations can contain a Double Top or
Double Bottom formation within their patterns. For this reason, you
may encounter situations where you must decide whether to act on the
original breakout or wait for a signal occurring later in the more
complex formation.
Double Top Formation
The example chart shows a first top at 39 which is followed by a
decline to 34. The security then rallies back to 39. The two tops at
39 constitute the double top. A buy signal (shaded X) is registered
when price breaks above the 39 level.
Double Bottom Formation
The example chart shows a first bottom at 40 which is followed by a
rally to 44. The security then falls back to 40. The two bottoms at 40
constitute the double bottom. A sell signal (shaded O) is registered
when price breaks below the 40 level.
40
38
36
34
42
Double Bottom Formation
44
40
38
42
Double Top Formation
36
106
Technical Indicators Reference Manual
Bullish and Bearish Signal formations
The Bullish and Bearish Signal formations are classic patterns used
in the timing of stock trades.
Bullish Signal Formation
The significant feature of the Bullish Signal formation, which
requires four columns, is a higher bottom followed by a higher top. A
buy signal is given the first time that a higher top follows a higher
bottom. The chart remains bullish as long as price continues to make
higher bottoms and higher tops.
The example Bullish Signal formation consists of two down moves,
with the first bottoming at 33 and the second at 34, and two up
moves, with the first topping at 37 and the second reaching 38. This
pattern fits the classic definition of the Bullish Signal as it shows a
higher bottom (34 vs. 33) followed by a higher top (38 vs. 37). When
the second top was reached at 38, an upside breakout occurred and a
buy signal was registered.
40
36
38
44
42
34
Bullish Signal Formation
32
30
28
26
24
22
20
Bearish Signal Formation
Bearish Signal Formation
The Bearish Signal formation is the reverse of the Bullish Signal
Formation. Look for a lower top followed by a lower bottom. A sell
signal is given the first time that a lower bottom follows a lower top.
Note
In the Point and Figure
examples, the price point at
which buy or sell signals are
given is indicated by a shaded
box.
Chapter I: Technical Indicators Explained
107
The example Bearish Signal formation consists of two up moves, with
the first peaking at 30 and the second at 28, and two down moves,
with the first bottoming at 26 and the second reaching 25. This
pattern fits the classic definition of the Bullish Signal as it shows a
lower top (28 vs. 30) followed by a lower bottom (25 vs. 26). When
the second bottom was reached at 25, a downside breakout occurred
and a sell signal was registered.
Bullish and Bearish Symmetrical Triangles
These formations are variations of the Bullish and Bearish Signal
formations. What distinguishes these formations is that the chart
pattern preceding the breakout is in the form of a triangle, a
formation that has always played an important role in chart analysis.
Bullish Symmetrical Triangle
The chart shown consists of five columns. The last four columns
form the classic bullish pattern of higher bottoms and higher tops.
The higher top at 46 signals a buy. The additional element is the
extra column on the left which shows a higher top at 47 than the next
top which is at 45. When trend lines are drawn along the tops and
bottoms of this formation, a symmetrical triangle is apparent.
Bullish Symmetrical Triangle Bearish Symmetrical Triangle
Bearish Symmetrical Triangle
The last four columns of the chart above form the classic bearish
pattern of lower tops and lower bottoms. The lower bottom at 40
signals a sell. The additional element is provided by the extra
50
48
46
44
42
40
40
42
44
46
38
36
108
Technical Indicators Reference Manual
column on the left which shows a lower bottom at 39 than the next
bottom which is at 41. When trend lines are drawn along the tops
and bottoms of this formation, a symmetrical triangle is apparent.
Triple Top and Triple Bottom formations
The Triple Top and Triple Bottom formations are classic patterns
used in the timing of stock trades. They are similar to the Double
Top and Double Bottom formations but an additional top or bottom is
required prior to breakout.
Triple Top
In this pattern, only the action at previous tops is significant. Unlike
the Bullish Signal formation, higher bottoms are not required. The
only requirement is the two tops prior to the breakout. The
establishment of a third top compensates for the absence of a higher
bottom.
The example below shows a base of accumulation between 29 and 33
with a level bottom at 29. The first two tops are made at 32 and 33
(the second top need not be higher; it may be the same as or lower
than the first). The buy signal is given at 34 after the penetration of
the two previous highs.
Triple Bottom
In this pattern, only the action at previous bottoms is significant.
Unlike the Bearish Signal formation, lower tops are not required.
The only requirement is the penetration of the two previous bottoms.
The establishment of a third bottom compensates for the absence of a
lower top.
Triple Top Formation Triple Bottom Formation
38
36
34
32
30
48
46
44
42
40
Chapter I: Technical Indicators Explained
109
The example shows distribution topping between 44 and 48 with a
level top at 48. The first two bottoms are made at 44 (the second
bottom need not be the same; it may be lower or higher than the first).
The sell signal is given at 43 after the penetration of the two previous
lows.
Spread Triple Top and Bottom formations
These are very broad formations which can consist of many columns
(six or more) and can require years to develop. Often, buy and sell
signals from other formations occur while these patterns are
developing. However, many traders prefer to wait for a breakout from
this type of pattern before taking action.
Spread Triple Top
Shown below is an example of a Spread Triple Top. The buy signal
is given when the level top at 54 is finally penetrated on the third
attempt. Notice that the three tops are not consecutive but are
separated by intervening moves.
Spread Triple Top Formation
58
56
54
52
50
48
110
Technical Indicators Reference Manual
Spread Triple Bottom
Shown below is an example of a Spread Triple Bottom. The sell
signal is given when the level bottom at 62 is finally penetrated on
the third attempt. Notice that the three bottoms are not consecutive
but are separated by intervening moves.
Spread Triple Bottom Formation
68
66
64
62
60
58
Chapter I: Technical Indicators Explained
111
32
36
30
28
34
38
50
48
46
44
54
52
Bullish and Bearish Catapult formations
These formations frequently occur following Triple Top or Triple
Bottom formations when the original move in the direction of the
signal is interrupted by a short reversal move. Another and often
more reliable signal is given when a fourth top or bottom is made.
Bullish Catapult
This formation begins with the classical Triple Top. However, the
initial rally is brief and is followed by a similarly brief pullback.
When a fourth top is made (see example below), a new buy signal is
registered.
Bearish Catapult
This formation begins with the classical Triple Bottom. However, the
initial decline is brief and is followed by a similarly brief recovery.
When a fourth bottom is made (see example below), a new sell signal
is registered.
Bullish Catapult Formation Bearish Catapult Formation
112
Technical Indicators Reference Manual
Bullish and Bearish Signal Reversed formations
Bearish Signal Reversed
The first six columns of this formation display the classic pattern of
lower tops and lower bottoms. Although it starts out looking exactly
like a Bearish Signal formation, an unexpected price reversal takes
place in the seventh column. The buy signal is given when the first
prior top is penetrated. According to A. W. Cohen
(Reference No.
12)
, the momentum of this straight upward reversal in the seventh
column usually carries far enough to yield a substantial profit.
Bullish Signal Reversed
The first six columns of this formation display the classic pattern of
higher bottoms and higher tops. Although it starts out looking
exactly like a Bullish Signal formation, an unexpected price reversal
takes place in the seventh column. The sell signal is given when the
first prior bottom is penetrated. According to Cohen, the momentum
of this straight downward reversal in the seventh column usually
carries far enough to yield a substantial profit.
Bearish Signal Reversed Formation
68
66
64
62
60
58
56
Chapter I: Technical Indicators Explained
113
Value shown in Control Panel
The value shown for Point and Figure is the closing price for the date
displayed.
Changeable constants
Box Size
(1/8 pt)
Price Range ($) Default Range
0 to 5 2 1-8000
5 to 20 4 1-8000
20 to 100 8 1-8000
100 to 500 32 1-8000
500 to 2004 128 1-8000
2004 to 5012 256 1-8000
5012+ 512 1-8000
Default Range
Reversal
3 1-100
Months
24 1-120
Bullish Signal Reversed Formation
58
56
54
52
50
48
114
Technical Indicators Reference Manual
No comments:
Post a Comment