I recently put together a video explaining how Point & Figure charting can be useful to any trader or investor. P&F charts eliminate small price movements, and help us focus on the most significant price changes and trend developments. As such, they can help us stay with the stronger trends, as a lot of small counter-trend movements are filtered out. They also help us identify breakdowns that may result in more significant trend changes. As such, they help to confirm signals provided by traditional charts in an effort to avoid false breakouts.
I don’t use P&F charts by themselves. The price changes needed to identify breakouts and breakdowns are less sensitive than traditional charting – and markets move quickly these days. However, I do like to refer to P&F charts when trying to ascertain the viability of a bigger trend potential. For example, I used P&F charts recently to try and determine if the rally we got in late June/early July was to be trusted. As I explain in the video, the reversal rule used in my P&F chart did not trigger a buy signal, which kept me cautious and in cash. So far, the SPX has remained below its resistance point of near 3900 since posting the video.
I do not use P&F charts to trigger trades – but I do find the basic P&F trend and reversal signals to be valuable input when combined with the more traditional charting I employ. Here is the video: Understanding Point & Figure Charting – ValueTrend
2 Comments
“P&F charts eliminate small price movements, and help us focus on the most significant price changes and trend developments. As such, they can help us stay with the stronger trends, as a lot of small counter-trend movements are filtered out.”
Keith, I wonder if you would consider Heikin Ashi as a viable alternative to the P&F method. According to Investopedia, this technique “averages price data to create a Japanese candlestick chart that filters out market noise. This gives the chart a smoother appearance, making it easier to spots trends and reversals, but also obscures gaps and some price data.”
Thoughts?
Thanks for this Andy–I will confess I have no experience with the H.A charting methods. I studied TA during the 1990’s, got my CMT in 2001. Curriculum didn’t include that methodology and I never took the time to explore it–on TA I know uses it, along with the “clouds” Japanese analysis tool–so I am sure there is validity to it.
Old dog, new tricks problem for me, I guess.
I will look into it, as you have inspired me to do so. But I cant offer any thoughts currently given my lack of familiarity with the method.