14401384 XO____8OCOX___+________________________________ 13841331 XO....XOXO56...+.......................|....... 13311280 3O....XOX2XO...|+......................|....... 12801231 XO....7OXOXO...|.+.....................|....... 12311183 XOX...XOXOXO...|..+....................|....... 11831138 XOXOX_XO_3XO_______+___________________________ 11381094 X4XOXOX..OX7...|....+..................|....... 10941052 XOXOXOX..OXO...|.....+.................|....... 10521012 XOXOXOX..OXO...|......+................|....... 1012973 XOXOXOX..OXO...|.......+...............|....... 973935 2OXO5OX__O4O____________+______________________ 935899 XOXO.OX..O.8...|.........+.............|....... 899865 1O...OX..|.O...|..........+............|....... 865831 .....O6..|.O...|...........+...........|....... 831799 .....O...|.O..+|............+..........|....... 799769 ___________9__X+_____________+_________________ 769739 .........|.OX.X1+.............+........|....... 739711 .........|.OXOXO.+.............+.......|....... 711683 .........|.OXOXO..+.............+......|....... 683657 .........|.OAOXO...+.............+.....|....... 657632 ___________OXOXOX___+_____________+____________ 632607 .........|.OXOX2XO...+.............+...|....... 607584 .........|.OXBXO4O....+.............+..|....... 584562 .........|.OXO.OXO.....+.............+.|....... 562540 .........|.OX..OXO......+.............+|....... 540519 ___________OX__OXO_______+_____________+_______ 519499 .........|.OX..3XO........+............|+...... 499480 .........|.OX..O.5.........+...........|.+..... 480462 .........|.O...|.O..........+..........|....... 462444 .........|.....|.O...........+.........|....... 444427 _________________O____________+________________ 427410 .........|.....|.O.............+.......|....... 410395 .........|.....|.OX.............+......|....... 395379 .........|.....|.OXO.............+.....|....... 379365 .........|.....|.OXO..............+....|....... 365351 _________________O6O_______________+___________ 351337 .........|.....|.O.O................+..|....... 337324 .........|.....|...O+................+.|....... 324312 .........|.....|...O.+................+|....... 312300 .........|.....|...7..+................+....... 300288 ___________________OX_X+________________+______ 288277 .........|.....|...OXOXO+..............|.+..... 277267 .........|.....|...OXOXO.+.............|....... 267256 .........|.....|...OXOXO..+............|....... 256246 .........|.....|...OXOXO...+...........|....... 246237 ___________________OXOXO____+__________________ 237228 .........|.....|...OXO.8.....+.........|....... 228219 .........|.....|...OX..O......+........|....... 219211 .........|.....|...OX..O.......+.......|....... 211203 .........|.....|...O...O........+......|....... 203195 _______________________9_________+_____________ 195187 .........|.....|.......O..........+....|....... 187180 .........|.....|.......O...........+...|....... 180173 .........|.....|.......O.+..........+..|....... 173167 .........|.....|.......O..+..........+.|....... 167160 _______________________O___+__________+________ 160154 .........|.....|.......O....+..........+....... 154148 .........|.....|.......O....X+.........|+...... 148142 .........|.....|.......O....XO+........|.+..... 142137 .........|.....|.......A....XO.+.......|....... 137132 _______________________O____XO__+______________ 132127 .........|.....|.......O....XOX.X+X....|....... 127122 .........|.....|.......OX...XOXOXOXO...|....... 122117 .........|.....|.......OXOX.XOXOXOXOX.X|X...... 117112 .........|.....|.......OXOXOXOXOXOXOXOX1XO..... 112108 _______________________OXOXOXOXO_OXOXOXOXO_____ 108104 .........|.....|.......O.OXOBO...OCOXOXOXO..... 104100 .........|.....|.........O.O.....O.OXO.O.O..... 10096 ---------0-----0-----------------------0------9692 ---------1-----2-----------------------3------92
A better-fit line might also be drawn in those cases where the movement has proved so dramaticthat the old, slow moving line seemed irrelevant, as in the case of the original bearish resistanceline in the tech stock BTG [BGC.L] and therefore, new and better fitting lines weresubsequently introduced.105
The Complete Guide to Point-and-Figure Charting
ConclusionA chartist can be very successful in his trading by using nothing more than the simple andcomplex signal formations discussed earlier for the placing of orders. But there is a better way.It involves combining signals with trend lines. Through the use of trend lines it is possible topredict areas where support and resistance are likely to occur. This knowledge coupled with theability to graphically view the long-term nature of the price action aids the chartist ineliminating many potentially unreliable or false signals while permitting better executionsthrough the technique of buying on weakness and selling into strength, an order executionphilosophy unaffected by periods of limit trading.
106
Chapter
3
Trading applications
•
Judging the distance of a move
•
The use of stop orders
•
Risk and position size
•
Pyramiding made simple and profitable
•
Swing trading
•
Day-trading, speed trading, scalping andmarket making
•
Extending p&f to other markets
•
About shorting, brokers and commissions
•
Tips from experienced traders
The Complete Guide to Point-and-Figure Charting
Judging the distance of a moveCalculating price objectives with horizontal and vertical countsThere are two vital pieces of information sought by a trader:1.2.
the direction of the price trend, andthe probable distance of a move.
The direction of a trend is indicated by signals and trend lines as discussed in the first chapters,while this chapter is devoted to the prediction of the distance of a move.Two methods of calculating price objectives
There are two methods for determining the probable distance of a move, often referred to as theprice objective:1.
One is by the use of trend lines coupled with data on general market strength. In thismethod, as reviewed in the prior chapter, an upside price move will usually be containedby the first bullish resistance line if the general market climate is bearish, the second lineis a neutral market and the third line is a bullish market. And the opposite holds true for abearish price formation which is constrained by the first, second or third support line.
2.
The other method of calculating price objectives is by the use of horizontal and verticalcounts.
The use of counts has the advantage of yielding a precise objective, while the trend line methodestablishes an objective which changes with each price reversal. This occurs because eachreversal moves the chart one row to the right and the resistance lines, drawn at 45 degree risingangles, two boxes higher and the support lines, drawn at 45 degree declining angles, two boxeslower.But the two methods complement each other by displaying price objectives in different mannersand the sum total of both presents the best picture, for it contains the greatest amount of data.Calculating price objectives from a horizontal count
The size of a base or a top has a direct relationship to the price objective. The more extensivethe base or top formation, meaning the more columns of Xs and Os in the formation, the greaterthe price objective will be above the low point of the base or below the high point of the top.The first step in the calculation of an upside price objective involves the determining of a base.108
Trading Applications
Definition of a base
A base is defined as a price pattern which shows a tremendous reluctance to break into new lowprice ranges. The base is then measured for width, meaning the number of columns composing it.=====
Example 3.1 – Horizontal price objectiveChart 3.1 – Abbey National [ANL.L] horizontal price objectiveANL.L / 3 box rev,/ 2000.07.18 to 2001.03.271360 ...................................................|.................. 13601280 ...................................................|.................. 12801260 ...................................................X.................. 12601240 ...................................................1OX.X.....X........ 12401220 ...................................................XOXOXOX.X.XO....... 12201200 _________________________________________________X_XOXOXOXOXO3OX______ 12001180 ...............................................X.XOXOXO2OXOXOXOXO..... 11801160 ...........................................X.X.XOXOXOXO.O.O.OXOXO..... 11601140 ................................Hu.........XOXOXOXO|O.......OXOXO....X 11401120 .........................................X.XOXOXOX.|........OXO.OX...X 11201100 _______________________________________X_XOXOXO_O___________OX__OXO__X 11001080 .....................................X.XOXOCOX.....|........O...OXOX.X 10801060 .....................................XOXOXO.O......|............OXOXOX 10601040 .....................................XOXO..........|............O.OXOX 10401020 .....................................XO............|..............O.OX 10201000 _____________________________________X______________________________OX 1000990 .....................................X.............|................OX 990980 .....................................X.............|................OX 980970 .....................................X.............|................OX 970960 .....................................B.............|................O. 960950 _____________________________________X________________________________ 950940 .....................................X.............|.................. 940930 .........................X...........X.............|.................. 930920 .........................XOX.........X.............|.................. 920910 .......................X.AOXO........X.............|.................. 910900 _______________________XOXOXO____X_X_X________________________________ 900890 .......................XOXO.OX.X.XOXOX.............|.................. 890880 .............X...X...X.XOX..OXOXOXOXOX.............|.................. 880870 .............XO..XOX.XOXOX..OXOXOXOXOX.............|.................. 870860 .........X...XOX.XOXOXOXOX..OXO.O.O.O..............|.................. 860850 _________XOX_XOXOXOXOXO_O___OX________________________________________ 850840 .......X.XOXOXOXOXO.OX......OX.....................|.................. 840830 .......XOXOXOXOXO...O.......OX.....................|.................. 830820 .......XOXOXOXO.............OX.....................|.................. 820810 .......XOXO.9X..............OX.....................|.................. 810800 _______XOX__OX______________O_________________________________________ 800790 .....X.XO...OX.....................................|.................. 790780 .X...XOX....O......................................|.................. 780770 OXO..XOX...........................................|.................. 770760 OXO..XOX...........................................|.................. 760750 O_O__XO_______________________________________________________________ 750740 ..OX.X.............................................|.................. 740730 ..OX8X.............................................|.................. 730720 ..OXOX.............................................|.................. 720710 ..OXO..............................................|.................. 710700 __O___________________________________________________________________ 700690 ...................................................|.................. 690520 ...................................................|.................. 520510 ...................................................|.................. 510500 ---------------------------------------------------0------------------ 500490 ---------------------------------------------------1------------------ 490
ANL in the chart above has a nine-column wide base (highlighted). The width of the base is thenmultiplied by the value of a reversal in order to determine the distance of the move.109
The Complete Guide to Point-and-Figure Charting
The value of a reversal is defined as the minimum number of boxes required for a reversal (threeboxes) multiplied by the value of a box (10 points). Thus the reversal value for the ANL chartis 30 points (three boxes multiplied by 10 points) and the distance of the move is the ninecolumn width of the base multiplied by the 30-point reversal value for a total of 270 points. Thisfigure is then added to the lowest point of the base, 860 points, which yields the horizontal priceobjective of 1130 as marked on the chart by the letters Hu. The calculation of the horizontalprice objective can be summarized as:
Upside HorizontalCount PriceObjective
=
Lowest Value inthe Base in Points
+
Base’s Width in Columns xMinimum Reversal Value inBoxes x Box Value in Points
orHu = Vlow + (W x Rm x Vbox)ANL: 1130=860 + (9 x 3 x 10)=====Price objectives on the downside
The calculation of the horizontal price objective on the downside is basically the reverse of theupside calculation, as we shall see in the example of ICI. The top’s width is multiplied by thereversal value and this figure is subtracted from the highest point in the top.=====
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Trading Applications
Example 3.2 – Horizontal price objective on the downsideChart 3.2 – ICI [ICI.L] price objectiveICI.L / 3 box rev / 1998.01.02 to 1999.12.091240122012001180116011401120110010801060104010201000980960940920900880860840820800780760740720700680660640620600590580570560550540530520510500490480470460450440430420410400390380370360350340330
...............X....................................|..................................... 1240...............XO...................................|..................................... 1220_______X_______XO_________________________________________________________________________ 1200.......XO..X...XO...................................|..................................... 1180...X...XO..XOX.XO...................................|..................................... 1160...XOX.XO..XOXOXO...................................|..................................... 1140...XOXOXO..XOXOX6...................................|..................................... 1120_X_XOXOXOX_XOXO5O_________________________________________________________________________ 1100.XOXO3O.OXOXOXO.O......................................................................... 1080.XOXO...OXOXO...O...................................|..................................... 1060.XOX....O.O4....O...................................|..................................... 1040.XO.......O.....OX..................................|..................................... 1020_X______________OXO.______________________________________________________________________ 1000.X..............OXO.................................|..................................... 980.2..............OXO.................................|..................................... 9601X..............7.O.................................|..................................... 940OX................O.................................|..................................... 920OX________________O_______________________________________________________________________ 900O.................O.................................|..................................... 880..................O.................................|..................................... 860..................OX................................|..................................... 840..................OX8...............................|..........................X.......... 820__________________OXO__________________________________________________________XO_________ 800..................OXO...............................|..........................XO......... 780..................OXO...............................|..........................XO......... 760..................OXO...............................|......................X.X.XO......... 740..................OXO...............................|......................XOXOXO......... 720__________________O_O____________________________________________________X_XOXO89_________ 700....................O....................................................XOXOXO.OA.....X.. 680....................O...............................|..................X.XO56X..OXO....XO. 660....................OX..............................|..................XOXO.OX..OXO..X.XO. 640....................9XO..............X..............|..................XOX..O7..OXOX.XOXO. 620____________________OXO_________.____XOX___X____.X.________________X___XO___O.__OXOXOXOBCX 600....................O.O........X.....XOXO..XO....XO.|..............XO..X........O.OXOXO.OX 590......................O........XO....XOXOX.XO..X.XO................XO4.X..........OXOX..OX 580......................O........XO....XOXOXOXO..XOXO.|......X.......XOXOX..........O.O...OX 570......................O........XO....XOXOXOXOX.XOXO........XO......XOXOX................O. 560______________________O._______XO____BO_OXOXOXOXO_O.___..X_XOX_X___XOXO___________________ 550......................OX.......XO....X..O.O.OXOX..OX|....XOXOX3XOX.XOX.................... 540......................OXO......XO....X......OXOX..OX1....XO2OXOXOXOXOX.................... 530......................OXO......XOX.X.X......OXOX..OXO....XO.OXO.OXOXO..................... 520......................OXO......XOXOXOX......OXO...OXOX...X..OX..O.O....................... 510______________________O_OX_____XOXOXOX______OX..__OXOXOX_X_.O_____________________________ 500........................OXO....XOXOXOX......OC....OXOXOXOX................................ 490........................OXOX.X.XOXO.O.......O.....O.OXOXOX................................ 480........................OXOXAXOXOX..................O.O.OX................................ 470........................O.OXOXOXOX..................|...O................................. 460__________________________OXO_OXOX________________________________________________________ 450..........................OX..O.O......................................................... 440..........................OX........................|..................................... 430..........................O.........................|..................................... 420....................................................|..................................... 410_____________Hd___________________________________________________________________________ 400....................................................|..................................... 390....................................................|..................................... 380....................................................|..................................... 370....................................................|..................................... 360__________________________________________________________________________________________ 350....................................................|..................................... 340....................................................|..................................... 330
DownsideHorizontal CountPrice Objective
=
Highest Value ofTop in Points
+
Top’s Width in Columns xMinimum Reversal Value inBoxes x Box Value in Points
orHd = Vtop - (W x Rm x Vbox). In the ICI example: 400 = 1240 – (14 x 3 x 20)=====111
The Complete Guide to Point-and-Figure Charting
Summary: calculation of the horizontal count
1.
Establish the width of the base. No clear rules exist, which leaves room for interpretation.
2.
Multiply: width in columns x reversal in boxes x box size.
3.
For up move: add calculated horizontal count number (2, above) to low of the base; fordown move: substract result from high.
Calculating price objectives from a vertical count
The calculation of price objectives from vertical counts is a simpler procedure than calculatingthem from horizontal counts. The vertical method does not require the finding and measuring ofbases and tops, often a subjective act since few tops and bases are clear and concise, and thereis substantial room for disagreement among chartists as to exactly what constitutes a base or topwhen a specific chart is viewed.In using the vertical count method the first step is to find the peak of a run or the bottom of adecline, and since we are working after the fact this is an exact and indisputable chart point.Example 3.3 – Vertical count price objective
In the Johnson Matthey example on the right, the bottom is 260.To calculate the price objective on the upside, first add up the number of boxes comprising thefirst up move after the bottom, or after the final bottom if there are two or more bottoms at thesame level – 14 in our JMAT example.This vertical box count is then multiplied by the reversal value, which (chosen purposefully) is30, calculated as 3 x 7.5. The reversal value, as already discussed, is defined as the minimumnumber of boxes required for a reversal multiplied by the value of each box. The box size is putat 7.5 because the columns cross an area of change in scaling at the level of 290, namely from10 point boxes to 5 point boxes. The net result of the multiplication of the vertical count and thereversal value is 315, calculated as 14 x 3 x 7.5. This figure is then added to the value of thelowest O at the bottom (260) and the answer (575) represents the upside price objective. Thus:
Upside VerticalCount PriceObjective
112
=
Value in Points ofthe Low of theDecline
+
Number of Boxes in the FirstUpside Reversal after theBottom or the Upside Reversalafter the Last Level Bottom xMinimum Reversal Value inBoxes x Box Value in Points
Trading Applications
orVu = Vlow + (Ru x Rm x Vbox)JMAT: 1120 = 850 + (9 x 3 x 10)
Chart 3.4 – Vertical count with Johnson Matthey [JMAT.L]760740720700680660640620600590580570560550540530520510500490480470460450440430420410400390380370360350340330320310300290285280275270265260
......................|...........................................|...........................................|.....................____________________________________________......................|...............................+...........|.............+...............5.X+..........|...........7.X+............X.X6XO+.........|...........XOX9+.....____X_X4XOXO_+__________________X_XOXO_+____....XOXOXO.O..+.......|.........5OXO8O..+.......XOXO...O...+... VU|.........XOXO.OX..+......XOX....OX...+.....|.......X.XOX..OXO..X...X.XOX....O7O...+....|......+XOXOX..AXOX.XX_XOXOX____OXO____+_________+_XOXO6__OXOXOXO1OXO3O.....OXO.....+..|....+..XO.O...OXOXOXO.O2O.......OXO......+.|...+...X......O.O.OXO.OX+.......OXO.......+|..+....X.....+....O.O.OX.+......O.O........+.+...X.X....+.......O_OX__+_______O_________+____XOX___+________+.OX...+......O........+.+...XOX..+........+..OX....+.....O.......+|.X+..XOX.+........+...O......+....O......+.|.XOX.XOX+........+............+...O.....+..|.XOX3X4+........+....__________+__O____+_____XOXOX+________+_____...........+.O...+....|.XO.O+........+..................+O..+...C.|.2..+........+....................O.+....XO|.X..........+.....................8+.....XOX.X.........+........._____________OX_____XOXOX________+__________.............OX9....XO1OX.......+........................OXO....XO|OX......+.........................O.O..X.X.|OX.....+............................OX.XOX.|OX....+.............._______________OXOXOX__O____+_______________...............OXOXOX.|....+...............................OXOBO..|...+................................OAO....|..+.................................OX.....|.+..................._______________OX______+____________________...............OX.....+....................................OX....+|....................................OX...+.|....................................OX..+..|....................._______________OX_+_________________________---------------OX+----9-----------------------------------O+-----9---------------------
760740720700680660640620600590580570560550540530520510500490480470460450440430420410400390380370360350340330320310300290285280275270265260
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The Complete Guide to Point-and-Figure Charting
To determine the downside vertical count price objective, the number of boxes comprising thefirst downside reversal after the top is multiplied by the reversal value and the net result isthen subtracted from the highest x value.Example 3.4 – Downside vertical count price objectiveChart 3.5 – Vertical count with Kingfisher [KGF.L]KGF.L / 1999.01.04 to 2000.03.13940 .....................X.................................|..............930 .................X.X.X5................................|..............920 .................XOXOXO................................|..............910 .................XOXOXO................................|..............900 _________________XOXOXO_______________________________________________890 .................XOXOXO................................|..............880 .................XOXO.O................................|..............870 .................XOX..O................................|..............860 .................XOX..OX...X........................