sources to see if the missing data canbe found and introduced into the database. The trouble nowadays is that databases are checkedand crosschecked by the data providers themselves, so your chances of getting the missing orerroneous data from those sources are remote.It cannot be stressed enough that the data used has to be clean. This is achieved fairly simply fordaily data. Using tick or minute-by-minute data generates a much more complex situation. Herewe stress the importance of using a high-quality source, such as Tickdata (www.tickdata.com),which guarantees that the data is as good as it possibly can be. Companies like Tickdata are atgreat pains to clean the data and to make sure that it is error-free. Obviously if one would detectan unnatural spike, one should eliminate it, but not much more can be done with high-frequencydata.
How to program point-and-figureUsing a grid
Point-and-figure is best programmed using a grid in exactly the same manner as one uses a sheetof paper with squares. We stress that it is important to have done some charts manually in orderto really grasp the concept and understand the proposed program.In the program we use a matrix called grid. Its rows are the box or price levels and the columnsalso have the same meaning as on the paper grid used for manual charting. As default we use agrid with the size of 400 rows and 600 columns. Those values have been chosen in order thatwe can generate some massive charts.We use one grid (grid) where we store the relevant price information and a second grid (mgrid)where we store miscellaneous information regarding the chart such as trend lines and year andmonth separations.In the individual boxes of the grid we store not only Xs or Os, but we actually the record numberof the data-point within time series that caused the box to be filled. We indicate X or O witheither a positive or negative sign. Storing the record number allows us to retrieve the exact datawhen using the chart for simulated trading.
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Technical Notes
To use such immense grids is of course a waste of memory. One could also use a pointerstructure and actually use much less memory. But as memory is so generously available we wentfor the much more transparent grid-based solution.Automatic trend lines
It is crucial that the program does the 45 degree diagonal trend lines for you. This is importantbecause computerized trend lines are correct, precise and never overlooked. Everybody that hasused bar-chart programs with a trend line facility understands problems regarding ambiguousbreaks of trend lines, definition of a trend line and the difficulty in drawing it in presence ofoutliers.Our approach to computerized trend lines is straightforward. We define the minimum length forthe bullish support and the bearish resistance andd a minimum length for the bullish resistanceand the bearish support. Then we have the computer draw all trend lines possible that fulfil theconditions of the defined minimum length. We store the trend lines in the second grid structurewe mentioned above. It is important to store the trend lines in a format that allows you easily totest their existence while running strategies that use trend lines.We choose those minimums in order to maximize clarity of the chart and avoid anoverpopulation by minor trend lines. The settings we use are:••
minimum length for the bullish support and bearish resistance in the range of 5 to 10minimum length for the bullish resistance and bearish support in the range of 8 to 16.
We draw the bullish support and the bearish resistance lines starting 3 columns left to therelevant high or low and we always draw the trend lines to as much to the right as possible.Stability of parameters
If you run an optimisation/simulation program you must avoid the trap of over-fitting.As mentioned before we do this by optimising data over entire portfolios, by filtering the outputand by excluding suspicious parameter-sets. What we mean is that we like the optimisation if agradual change of a variable results in increases and decreases of the simulated P&L withoutwild fluctuations. We do not like situations where a singular parameter-set generatesextraordinary results.A singular parameter set is normally a parameter set which generates a low number of trades,but for whatever reason, had one or two excellent trades on the price-data tested. When you docomputerised optimisations you have to incorporate a way of filtering out such solutions. If youdo it manually – using one of the software packages we recommend – then you also have tocheck to see if a parameter set made all its profits in very few – normally 1 to 3 per year – tradesand dismiss it, if that were the case.
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The Complete Guide to Point-and-Figure Charting
SummaryWe recommend software packages and data vendors. We run for the optimisations/simulationsand charting our own program. The reason is that we like to do quite sophisticated simulations,which is beyond the scope of commercial software. Refer to this book’s website (described inthe Preface) for updates on our optimisations results.If you have the knowledge to program yourself, we suggest that you program your ownsimulation/optimisation software.•
238
We believe that the approach to work with a grid to store the XO columns and a grid tostore the trend lines is reasonable.
Appendices
239
Appendix 1 – Quick reference to Buy and Sell signals
Appendix 1Quick reference guide to buy and sell signalsBuy signalsB1B2B3B4B5B6B7B8
Double Top, or Simple Bullish BuySimple Bullish Buy with Rising BottomTriple TopAscending Triple TopSpread Triple TopUpside Bullish Triangle BreakoutUpside Breakout Above a Bullish Resistance LineUpside Breakout of a Bearish Resistance Line
Sell signalsS1S2S3S4S5S6S7S8
Simple SellSimple Sell with Declining TopTriple Bottom BreakoutDescending Triple BottomSpread Triple BottomDownside Bearish Triangle BreakoutDownside Breakout Below a Bullish Support LineDownside Breakout of a Bearish Support Line
Summary of buy signals630620610600590580570560550540530520510500490480470
B1...B2....B3.....B4.....B5.......B6........B7........+B8...............................................+....................+.................................................+...................X+................................................X+..................XO+..............X.....X......X......X........X...XO+.X...........X+..XOX+...........X.X...X.X..X.X.X....X.X..X.X...X...XOX+X...........X...XOXO+.X........XOX..OXOX..XOXOX..X.XOX..XOXOX.X...XOXOX..........+X....OXOX+X........XOX..OXOX..XOXOX..XOXOX..XOXOXOX...XOXOX+........+OX....OXOXOX.........O...OXO....O.O...XOXO....OXOXOX...XOXO+.+..O...+.OX....OXOXOX+............O.............O......O.O.O..X.XOX+.....O..+.XOX....O.O.O..........................................XOXO+......O.+.OXOX...................................................XOX+.......O+.XOXOX....................................................O+........OX.XO.O.....................................................+.........OXOXO.................................................................OXO...................................................................O.O.............................................................................................
630620610600590580570560550540530520510500490480470
Summary of sell signals470460450440430420410400390380370360350340330
S1...S2....S3.....S4......S5......S6........S7...........S8...............................................+......................................................................X+........X.X............................X.............X......X...X...OXO+.......XOXO.......................X...XOX....X.X...OXOX....XOXOXO..OXOX+......XOXOX........X.X..........OXO..XOXO..OXOXO..OXOXO..OXOXOXO..O.OXO+.....XO.OXOX......XOXOX........OXO..XOXO..OXOXO..OXOXO..OXOXO.O....OXOX+....X+.OXOXO.....XOXOXO.+.....O.O...O.O..O.O.O....O.O..O.O...O....OXOXO+...X.+O.OXO,....XOXOXO+........O.....O......O......O........O....OXOXO....X..+.O.O.....XOXOXO...........................................OXO+O....X...+..O.....XOXO+O...........................................OX+......X....+.O....OXOX+.O...........................................O+.............+O....OXO+..............................................+...............O....OX+..............................................+................O+...O+.....................................................................+.............
470460450440430420410400390380370360350340330
241
Appendix 2 – Glossary
Appendix 2Glossary of terms used in point-and-figure chartingAccumulation channelA rectangular pattern formed on a point-and-figure chart before the start of a bullish market (cf.distribution).BacktestingThe process of testing a trading strategy – or whatever hypothesis – on past data.Bar chartThe most widely used method to depict price moves graphically. A bar, or vertical line, is drawn betweenthe high and the low of the price range. Often the open is marked with a tick on the left side of the barand the close is marked with a tick on the right.BaseFormed by a sequence of point-and-figure columns around the same price levels. A characteristic basewould look like a square or rectangle. Bases are used to forecast future price targets via the horizontalcount method.Bearishi) In general terms, a price trend to lower levels, or investors’ pessimistic outlook.ii) In point-and-figure charting, a chart whose last signal was a sell signal.Bearish channelA price move confined by parallel bearish trend lines, on the upper side a bearish resistance line and onthe lower side a bearish support line.Bearish resistance lineA 45 degree, or diagonal, falling line that confines the upper level of a downward price trend.Bearish support lineA 45 degree, or diagonal, falling line that confines the lower level of a downward price trend.BoxThe base unit of a point-and-figure chart. The name box stems from the squares on the typical papersheets used for manual charting. Each box is defined by a price level and the size of the box is given bythe scale applied. A box can either be filled with an X or an O, or in some cases with a symbol thatindicates a time step, usually a new month.Box sizeThe distance between one box and the next. It can be fixed or variable and is defined by the scale.Bullishi) In general terms a price trend to higher levels, or investor’s optimistic outlook.ii) In point-and-figure charting, a chart whose last signal was a buy signal.Bullish channelA price move confined by parallel bullish trend lines, on the upper side a bullish resistance line and onthe lower side a bullish support line.243
The Complete Guide to Point-and-Figure Charting
Bullish resistance lineA 45 degree, or diagonal, rising line that confines the upper side of an upward price trend.Bullish support lineA 45 degree, or diagonal, rising line that confines the lower side of a upward price trend.Buy signalA signal or pattern observed on a point-and-figure chart which forecasts further up-moves and whichsuggests that long positions should be established and/or short positions closed out.Candlestick chartA traditional Japanese charting method, which instead of bars (cf. bar-chart) uses rectangles which areeither filled white if the close is higher than the open or black if the close is lower than the open. Manypatterns are described and used for forecasting.Classic scaleThe traditional scale used to define the box sizes for US stocks.Complex signalsThe buy or sell signals that are different from the simple buy or simple sell.Day-tradingAn active trading style that involves buying and selling the same security within the same day. Usuallythe position risks are largely reduced by end of each day.Distribution channelA rectangular area on a point-and-figure chart that is normally seen as a precursor to a down trend.End-of-day dataPrice information that is collected once the trading has terminated at the end of the day. Normally it isarranged in the following format: Date, Open, High, Low, Close, Volume.Fixed profit targetA profit target which establishes where the profit on a profitable position is taken. It is called fixedbecause it is defined by a fixed number of boxes. For example, 12 boxes. (Cf. Variable profit target).Fundamental analysisThe art of analysing and forecasting prices based on an assessment of the state of (1) a company asrepresented by the balance sheet and the market, or (2) an entire economy based on economic figures suchas growth, unemployment, currency flows etc.High-frequency dataPrice data of liquid instruments that is recorded transaction per transaction.Historical dataPast price or fundamental information.Horizontal countsThe point-and-figure method of predicting future price levels based on an accumulation or distributionpattern, i.e. a sequence of similar sized columns forming a rectangle.Hypothetical reversal levelThe price on a point-and-figure chart which, when reached, would generate a reversal. (Cf. price reversal).244
Appendix 2 – Glossary
Kagi chartA Japanese chart that has many similarities to a point-and-figure chart.Line chartA chart that is drawn by connecting data points on a line. It is the usual format for intraday charts, butseldom used for daily charts, where the closing prices would be connected to obtain the chart.Logarithmic box size scaleA scale where the box sizes always represent the same return regarding a price. For example, 10 boxesup means plus 100% (value doubled) and 10 boxes down 50% (value halved). They are used to draw longterm and comparable point-and-figure charts.Long; or long positionDefined (for stocks and bonds) by the ownership of securities; generally a portfolio that gains in value ifthe market goes up.OptimisationThe process of finding the parameters that give the best result. In point-and-figure charting it refers tofinding the best combination of box size and reversal number in order to obtain the best trading signals.Optimisation fallacyThe false belief that one can optimise a trading strategy on past data – in-sample-data – and get as goodresults for future trades or the out-of-sample data.Over-fitting fallacyThe error of designing an over-complex trading strategy with too many parameters that performs well onthe in-sample-data, but is actually no more than a close description of the past data. This is a problemoften encountered in time-series analysis and modelling.Point-and-figure chartA charting methodology that can be directly applied as a trading system, since it delivers clear entry / exitpoints and crystal clear trend lines. It is drawn by filling boxes either with Xs for rising prices and Os forfalling prices.PoleA long column of either Xs or Os.Price discretizationThe method of dividing financial data according to a price scale in contrast to the widely used divisionaccording a time scale.Price objectiveThe price level that is anticipated.Price reversalThe reversal of the price trend that is recorded on a point-and-figure chart, once the criteria – defined bythe minimal reversal number and box size – are fulfilled. This results in a new column to the right of thelast column and a switch from X to O or O to X. (Cf. Three Point Reversal Method.)PyramidingAn asset allocation methodology that increases the profitability of winning positions.
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The Complete Guide to Point-and-Figure Charting
Real-time dataPrice information that is delivered with the minimal possible delay.ResistanceA level that seems to impede prices from moving higher. The more often this level is touched, but notbroken, the stronger it gets. (Cf. support.)RiskThe amount of money one could lose if one’s position reaches the estimated worst case.RSIThe abbreviation of Relative Strength Index that is sometimes used by technical analysts to detectoverbought/oversold conditions.ScalingThe way of calculating the box sizes. It can be linear (e.g. each box measures 2), classic (Cf. classicscale), standard (cf. standard scale), logarithmic (Cf. logarithmic scale) or any other clear defined functionthat determines clearly how to fill the boxes on a point-and-figure chart.Standard scalingThe traditional scale used for all point-and-figure charts.Sell signalA signal observed on the point-and-figure chart which forecasts further down-moves and suggests thataction should be taken to close long positions and establish a short position.ShortA position that makes money if the price goes downSimple buy(See: Buy signal)SimulationThe process of mimicking real trading. Normally, it refers to the testing of trading strategies on historicaldata without the benefit of information after the start of the strategy in order to make the results of suchtests as realistic as possible. For example, a trading strategy might be defined based on the data historyspanning 1995 to 2000, and then this strategy would be tested over the years 2001-2002.Stop orderAn order that is not placed at the current price level, which becomes a market order – i.e. an order toperform a transaction after the specified level is reached. Buy stop orders are placed above, and sell stoporders are placed below, the current market price.Stop-limit orderThis is similar to a stop order, whereby the order becomes a limit order once the specified price is touched.Stop-loss orderA stop order used to close positions.SupportA price level that holds on a down-move and is therefore not broken. The more often this level is touched,but not broken, the stronger the support gets.
246
Appendix 2 – Glossary
Swing tradingThe art of trading the mid-term cycles of a financial instrument, using both long and short positions.Technical analysisThe concept of forecasting price moves based on observed patterns on a chart, following the lemma thatall information is in the price.Three-box reversal methodThe most widely used point-and-figure chart that has a defined minimal reversal count of three, meaningthat a new opposite column can be drawn if and only if the existing last column can not be continued andthe price move does allow three boxes in the opposite direction to be filled.Tick dataPrice data which is reported on a transaction by transaction basis. It is used in point-and-figure to drawintraday charts.Trend linesLines that confine or seem to confine price moves. In point-and-figure charting they are always either45% upwards (bullish) or 45% downwards (bearish).Variable profit targetA calculated, and therefore price-dependant, price target at which an open and profitable position will beclosed and profits taken.Vertical countsAn approximate forecast of the target of future price moves based on past observations of major up ordown-moves on the point-and-figure chart.VolatilityThe variability of the price data series. Historical volatility refers to the standard deviation of the historicreturns or differences of prices from one day to the next. Implied volatility is the volatility defined by thequoted options prices, therefore it can be explained as the expected future variability of the prices.VolumeThe number of stocks/bonds/futures/other instruments traded.WhipsawingResults from a string of wrong trading signals generating a considerable loss through the accumulation ofsmall losses through the frequent change of positions.
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Appendix 3 – Recommended websites
Appendix 3Recommended websitesPoint-and-figure software
We recommend any of the following programmes (in alphabetical order):•
MetaStock (www.equis.com), for very basic point-and-figure. We include this softwarein our list because as it is the most popular it is possible that the reader has access to alicence.
•
PFScan (www.pfscan.com), a software boutique’s outstanding application with uniquefeatures for scanning markets.
•
Updata (www.updata.co.uk), probably the world’s best point-and-figure charts.
For any readers who are interested in our proprietary software, we suggest that you contactus through this book’s web site: www.harriman-house.com/pnf.Data providers
•
MetaStock with Reuters Data Link (www.equis.com)
•
Updata Trader II Professional’s own data feed (www.updata.co.uk)
•
Paritech (www.paritech.co.uk)
•
Olsen, for tick data (www.olsen.ch)
•
LSE (www.londonstockexchange.com)
•
TickData, for US tick data (www.tickdata.com)
•
Yahoo (finance.yahoo.com)
•
ADVFN (www.advfn.com)
•
Downloadquotes (www.downloadquotes.com)
•
Sharescope (www.sharescope.co.uk)
•
Hemscott (www.hemscott.net)
Subscription charts
•
Stockcube (www.stockcube.co.uk)
•
Chartcraft (www.chartcraft.com)
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The Complete Guide to Point-and-Figure Charting
Exchanges
•
LSE (www.londonstockexchange.com)
•
CBOE (www.cboe.com)
•
CME (www.cme.com)
•
Eurex (www.eurexchange.com), excellent tick data available from www.deutscheboerse.com
•
Island (www.island.com)
•
LIFFE (www.liffe.com)
•
Virt-X (www.virt-x.com)
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Appendix 4 - Bibliography
Appendix 4Bibliography
The All New Guide to the Three-Point Reversal Method of Point & Figure ChartingMichael L. BurkeChartcraft, 1993
Stephen Eckett on Online InvestingStephen EckettHarriman House, 2002
Fooled by Randomness: The Hidden Role of Chance in the Markets and in LifeNassim TalebTexere, 2001
The Money Game
Adam SmithRandom House Trade Paperbacks, 1976
Paul Wilmott on Quantitative FinancePaul WilmottJohn Wiley, 2001
Point & Figure Commodity & Stock Trading TechniquesKermit C. ZiegTraders Press, 1997
-------------------------------------------------------------------------------All the above books can be bought from the Global-Investor Bookshophttp://www.global-investor.comtel. +44 (0)1730 233870
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IndexADVFN, 45
Gold, 158-159
Bar charts
Intraday data – See Price data
example, NASDAQ, 10
Brokers, 164Buy signals
ascending triple top, 67breakout of a triple top, 67simple buy, 66simple buy with rising bottom, 66spread triple top, 68upside breakout above bearish resistance line, 69upside breakout above bullish resistance line, 69upside breakout above bullish triangle, 68
Candlestick charts
example, NASDAQ, 11
Chartcraft, Inc., 16, 53Cohen, A.W., 16Company codes, 6Computer hardware
recommended equipment, 24use in optimisations, 230-231
Data vendors, 45Davis Study – See Profitability analysisDavis, Robert E. – See Profitability analysisDay-trading – See TradingDiscretization, 32Dividends, 39, 234E-Signal, 45Eurex, 156Fundamental analysis, 15-16Gann, W.D., 138Global Financial Data, 45
Kagi charts
example, NASDAQ, 12
Line charts
example, NASDAQ, 9
London Stock Exchange, 45, 156MatLab, 231-233MetaStock, 46, 47, 48Oil, 159Olsen, 45, 157Optimisation
benefits, 195data quality, 235-236methodology, 178objectives, 180over-fitting, 180, 183selection of data sets, 179-180software, 187strategies, 181-182use of computers, 230
Paritech, 45PFScan, 46, 49, 50Point-and-figureadjusting for dividends, 39advantages of, 14-15basic example, 25-26commodity trading, 158-161example, NASDAQ, 13filtering signals, 63history of, 16manual charts, 24market psychology, 57profitability of – See Profitability analysisprogramming, 236-237starting a chart, 36253
The Complete Guide to Point-and-Figure Charting
Point-and-figure (contd.)the 16 formations, 64-67time, 39-40underlying philosophy, 22
Price data, 38, 45, 150-155Profitability analysis
Davis Study, 65, 80, 199-200Davis-Thiel research, 201Weber-Zieg research, 212-213Zieg research, 201-211
Silver, 167-168Simulations – See OptimisationsSoftware, 45-46, 156-157, 187, 231-233Speed trading – See TradingSplits, 234Stockcube, 53Stop orders – See Trading
Pyramiding – See Trading
Swing trading – See Trading
Quantitative theory
TickData, 45, 157
history of, 220random walk theory, 221-223
Reversals, 28, 37, 172-174RSI, 174Scaling
bonds, 160commodities, 161Dow example, 33-34explanation of, 26how to scale, 31-32logarithmic charts, 225-226market indexes, 162standard box sizes, 34variable box sizes, 35
Scalping – See TradingSell signals
breakout of a triple bottom, 74descending triple bottom, 74downside breakout below bearish support line, 76downside breakout below bullish support line, 76downside breakout of a bearish triangle, 75simple bearish sell with a declining top, 73simple sell, 73spread triple bottom, 75
Shorting, 164Signal/trade gap, 79-80
254
Tradingday-trading, 154-155limiting losses, 167-168position size, 129-132price objectives, 108-117pyramiding, 133-137reversals, 172-174RSI, 174stop orders, 118-128swing trading, 138-149taking profits early, 169-172transaction costs, 164-165
Trend linesBearish resistance lines, 101-103Bearish support lines, 95-100Bullish resistance lines, 89-91Bullish support lines, 85-88The 4 price channels, 82-83
Updata, 46, 51, 52, 156, 188Volatility, 185Volume, 44Whipsawing, 130-133Yahoo, 45
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