140393837
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The Complete Guide to Point-and-Figure Charting
How many contracts or shares should be added on each signal?
The question usually asked in relation to pyramiding is‘How many contracts or shares should be added on each signal?’Most pyramiding systems get bogged down at this point in a complicated model for building alarge base and adding progressively smaller units with each new signal (which is nebulous atbest). In other words, a normal (non point-and-figure) pyramiding strategy would have thetrader attempt to estimate the distance of the move and the number of signals which will occurin the move, both of which are difficult if not impossible to judge accurately.In the p&f pyramiding method, no predictions are made as to the distance the price will moveduring the trend, nor is there any guess as to the number of consecutive signals that will occurin a string. And lastly, no attention is given to progressively smaller additions being added oneach new signal. All that is required is to decide whether you want to start with one, two or morecontracts, which is a function of available capital, and then add an equal number of positions oneach new signal. Thus, if you start with one contract lot or one round lot (100 shares) of stock,one additional contract lot or round lot will be added on the second buy signal, one on the thirdand so forth, until all are liquidated on the first sell and one short is taken. If the initial positionis two lots, two are added on each successive signal.How very simple, and, as the early examples show, how effective!Chartists contemplating the prospects of pyramiding often question the legitimacy of addingnew positions rather than originally starting with a longer position and not pyramiding. Theyalso express some concern about the total margin or capital committed in such a trading strategy,for high margin / capital commitments can sometimes lower the return on invested capital in apyramided position.Why?Because if a trader knows that a certain stock is going to have a major move, he would naturallytake the maximum possible commitment on the original signal, for the first signal is the onewhich will always prove most profitable in a run. But since few of us can accurately predictwhich stocks or contracts will be the big movers or estimate the timing of the start of the move,it makes more sense to let the price action lead us into the heaviest commitment on the long sidein those situations which prove the strongest and the largest short positions in the ones that themarket designates the weakest. This is all that the p&f pyramiding system is attempting to do –to allocate dollars to the long side of the strongest securities or commodities and to the short sideof the weakest ones, while keeping a very nominal investment in the trendless issues. And bestof all, the allocation process is completely automatic. Guesses are now obsolete!
136
Trading Applications
Pyramiding increments
ts
These are valid areas of concern that we would like toaddress in the following way.The pyramiding program is without doubt a functionof the available capital per instrument.Say you wish to invest a certain amount of capital ina p&f trading strategy and decide to diversify equallyover 5 different stocks or bonds. In this situation, wethwould suggest that initially you commit 115 of thecapital to each position. Then increment the positionsthduring the process of pyramiding in steps of 115 ofthe capital. The denominator 15 is the result of 3times the number of different instruments. 3 is usedas an estimate of an average number in consecutivesignals triggering position increments throughpyramiding.
m
re
cIn
en
115115
Stock 1
115
115115
Stock 2
115
115115
Stock 3
115
115115
Stock 4
115
115115
Stock 5
115
SummaryPut away your stocks dart board and the crystal ball – there is a better way! Let the marketdecide where your money should be concentrated.The largest positions in your portfolio should be on the long side of the strongest stocksand the short side of the weakest ones, with only token positions in the trendless ones.This is exactly what the p&f pyramiding system does – automatically and with exactness. Allthat the trader has to do is add an equal number of additional contracts to the position with eachp&f signal, and automatically the big movers end up with the largest holdings.
137
The Complete Guide to Point-and-Figure Charting
Swing trading
IntroductionThe famous chartist and trader W.D. Gann pointed out correctly that stocks oscillate, or in hiswords vibrate, and that the most profitable way to trade any security is to benefit from as manysuch up and down swings as possible.Because there has been so much talk lately about swing trading, we want to explain it and showyou that for the implementation of swing trading nothing more is needed than point-and-figure.The problem with Gann’s type of trading is the large number of transactions, which makescareful implementation a necessity in order to find a balance between trading those minoroscillations and keeping transaction costs under control. It is true, though, that with direct accesstrading through discount brokers a lot of commission costs can be spared.What is swing trading?As with every fashionable subject, there are many different interpretations of the term swingtrading. Swing trading became popular again in the post-nineties, with the onset of enduringbear markets. Since swing trading does not depend on long-term up-trends, it is successful insuch bear market situations. It is an alternative to the long-term buy and hold investment style.Shorter position life-spans
In general swing trading has the same aim as point-and-figure trading, namely trading both thebearish and the bullish moves. Swing trading methodologies are based on technical analysis, andbecause, as mentioned many times before, point-and-figure is the best of all technical analysis,you do not need anything new in order to swing trade. However, in the consensus of thetechnical analysts, swing trading has slightly shorter position-life spans than standard 3 boxreversal p&f trading.In the following pages, we show you how to adapt p&f to gear it towards trading somewhatshorter cycles, in the range of one week to a couple of weeks.We are all aware that market prices oscillate. The scholars of the markets have come up withmany divisions of such fluctuations into major, minor, macro and micro trends. Remember theDow Theory or Prechter’s Elliot waves? Interestingly – and contrary to our philosophy – all theauthors mentioned, Dow, Gann and Elliott, belong to the mystical crowd of traders, usingbiblical figures or harmonic proportions in their systems.Swing trading is trying to profit from swings or oscillations with a duration of weeks.138
Trading Applications
Swing trading profits from fluctuations in markets that do not trend strongly upwards. Theexpectation that has to be set by the trader is whether he believes the markets are sideways ortrending. When going into markets, you have to make a bet about the future ‘trendiness’. If youbelieve that the markets will continue for a while without a trend, then swing trading is a goodalternative.To be a successful swing trader you just have to make minor adaptations to the traditional pointand-figure system, both in terms of box sizes and in the approach to taking profits, in order toshorten the typical life of a position.
Data to be usedEnd-of-day data
Swing trading is based on end-of-day data. Use the same data as for your normal point-andfigure charts. You should concentrate your swing trading on just a couple of stocks so it is easyfor you to control the quality of the data. Make sure that your data is precise, because, as manysignals are generated, you want to avoid glitches due to erroneous data.Intraday data
Of course, if you want to enhance the entry points further, you could use the samemethodologies as in day-trading and therefore base your graphs on intraday data. Ourexperience, however, has not shown a great enough improvement in order to justify the increasein complexity generated by the use of daily tick data. Moreover the use of intraday data onlymakes sense for screen traders, and those probably prefer day-trading anyhow or a combinationof both, where positions can be taken or closed several times during the day.
How to gear p&f towards swing tradingTo profit from the short-term trends of a security we use a standard scale with a box size asindicated in the table, but with a minimum reversal number of 2 instead of 3. With the smallerminimum reversal number and the smaller box size we enter and exit the swing earlier andfollow the short- to mid-term oscillations of the stock more closely. Moreover we take profitson positions after 10 boxes. This is indicated on the charts with a yellow mark. After the profitis taken, the next signal (either buy or sell) is awaited and traded upon.
139
The Complete Guide to Point-and-Figure Charting
Table 3.1 – Scale proposed for swing trading
From
To
BoxSize
1
1.4
0.01
1.4
2.9
0.02
2.9
6
0.05
6
14
0.1
14
29
0.2
29
60
0.5
60
140
1
140
290
2
290
600
5
600
1400
10
1400
2900
20
2900
6000
50
6000
14000
100
Which markets should you swing trade?The point with swing trading is this: if markets oscillate within trading ranges or channels,swing trading works well, but if markets trend strongly there are better ways to trade.In order to decide whether you should switch to swing mode, you should base your decision onthe study of long-term point-and-figure charts and judge whether the stock is confined by achannel or range. If that is the case, then, yes, go to swing trade mode.
140
Trading Applications
Swing trading in practiceFrom the brief paragraphs above you know enough about swing trading, at least in our opinion.Now we would like to show you how it works in practice.Let’s assume that you believe that the markets will stay confined to trading channels for a while,and so you therefore go to swing mode. You choose a strategy like:Reversal number: 2 boxesScale: scale for volatile securities (cf. table 3.1)Strategy: enter and exit on simple buy and simple sell signals, take profits early (8-12 boxes)And you start!On the following pages, we have included a few charts so that you can get a flavour of thistrading style. Underneath each of the charts we have included a brief analysis generated by ourprogram. The brief analysis includes the specifics of the strategy, namely the minimum reversalsize, the scale type and the strategy regarding the entry and exist of positions. Then it includesthe time period of the chart and the simulated trading results in points.Testing methodology
The only strategy used is S2iSSoSST12 which translates into:•••
Standard scale 2 box reversalin on Simple signalsout on Simple Signals or if a Target of 12 boxes is reached
We include a summary of the different strategies in the part covering optimisations.The profit in points can be measured against the absolute values of the prices. For example, inthe case of Next, where the first trading signal is generated at a level of 950, the profit of 472minus the deduction of an estimated 130 points of commission results in a profitability of 38%p.a., while excluding all possible leverage. Applying leverage used by professional traders andtheir lower commissions, the mentioned profitability gets multiplied by at least 5.The stocks we have chosen in this section are stocks we have actually traded or followed overthe shown period.
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The Complete Guide to Point-and-Figure Charting
Chart 3.16 – Swing trading, Next [NXT.L]NXT.L / 2 box rev, std2/ 2002.01.02 to 2002.12.061120 ........................................................................................................................ 11201110 _________________________________________X______________________________________________________________________________ 11101100 .........................................XO............................................................................. 11001090 .......................X.X.X.X.X.X.......XO............................................................................. 10901080 .......................XOX4XOXOXOXO......XO............................................................................. 10801070 .....................X.XO.OXOXOXOXO......XO............................................................................. 10701060 _____________________XOX__O_OXO_OXO__X_X_XO_____________________________________________________________________________ 10601050 .....................XO.....OX..OXOX.X5XOXOX............................................................................ 10501040 .....................X......O...O.OXOXOXOXOXO........................................................................... 10401030 .....................X............O.O.O.O.OXOX.......................................................................... 10301020 .....................X....................OXOXO......................................................................... 10201010 _____________________X____________________O_OXO__X______________________________________________________________________ 10101000 .....................X......................O.OX.XO..................................................................... 1000990 .................X...X........................OX6XO..................................................................... 990980 .................XOX.X........................OXO.O..................................................................... 980970 .....X.X.........3OXOX........................O...O..................................................................... 970960 _X___XOXO2_______XOXO_____________________________OX_____X_________________________X____________________________________ 960950 .XO..XO.OXOX.....XO...............................OXO..7.XO........................XO................................... 950940 .XOX.X..OXOXOX.X.X................................OXO..XOXO........................XO....X.X............................ 940930 .XOXOX..O.OXOXOXOX................................OXO..XOXO..............X.X.......XO....XOXO........X.................. 930920 1.OXOX....OXO.O.O.................................OXO..XO.O..............XOXO......XO....XOAO......X.XOX.X.............. 920910 __OXOX____O_______________________________________O_O__X__OX_____________XOXOX_____XOX___XO_O____X_XOXOXBXO_____________ 910900 ..OXO...............................................OX.X..OXO............XO.OXO....XOXO..X..O....XOXOXOXOXOX.X.X........ 900890 ..O.................................................OXOX..OXO..X.........X..O.O....XOXO..X..O....XO.OXOXOXOXOXOXO....... 890880 ....................................................OXOX..OXO..XOX.......X....O....XOXOX.X..O....X..O.O.OXO.OXOXO....... 880870 ....................................................O.OX..OXO..XOXO..X.X.X....O....XOXOXOX..O....X......OX..O.O.OX...... 870860 ______________________________________________________OX__OXOX_XOXO__XOXOX____O____XO_O_O___O__X_X______O_______OXO_____ 860850 ......................................................OX..OXOXOXOXOX.XO.OX....OX.X.X........O..XOX..............O.O..... 850840 ......................................................O...OXOXOXO8OXOX..O.....OX9XOX........O..XOX................OX.X.. 840830 ..........................................................OXOXOXO.OXOX........O.O.OX........OX.XO.................OXOXC. 830820 ..........................................................OXOXO...OXO.............O.........OXOX..................OXOXO. 820810 __________________________________________________________OXOX____OX________________________OXOX__________________OXO_O_ 810800 ..........................................................O.OX....O.........................OXO...................O...OX 800790 ............................................................O...............................OX........................OX 790780 ............................................................................................OX........................O. 780770 ............................................................................................O........................... 770760 ________________________________________________________________________________________________________________________ 760750 ........................................................................................................................ 750740 ........................................................................................................................ 740730 ........................................................................................................................ 730720 ........................................................................................................................ 720710 ------------------------------------------------------------------------------------------------------------------------ 710700 ------------------------------------------------------------------------------------------------------------------------ 700
Analysis of trading NXT.LMinimum Reversal
2
Scale Type
Standard
Start Date
2002-01-01
End Date
2003-02-01
Strategy
S2iSSoSST12
Gross P&L
472
Trades
26
Stops hit
4
In this brief analysis you see the parameters used: the date-interval, P&L, the number of tradesand the number of times profits were taken early, which shows up under ‘Stops hit’. P&L isindicated in ‘Gross P&L’.142
Trading Applications
Commissions
Commissions vary from broker to broker, but the tendency is clear, it gets cheaper. A moderatelyactive trader should not pay more than 0.1%. Please compare what you would pay for trading26 times Next, but it should be closer to 50 than to 100 points. Due to the individual cost oftrading we prefer to display the gross figure.Chart 3.17 – Swing trading Exel [EXL.L]EXL.L / 2 box rev, std2/ 2002.01.02 to 2003.01.17950940930920910900890880870860850840830820810800790780770760750740730720710700690680670660650640630620610600595590585580575570565
........................X.......................................................................................|...............................XO......................................................................................|...............................XO......................................................................................|...............................XO......................................................................................|.......________________________XOX_______X_____________________________________________________________________________________........................XOXOX.X...XOX...........................................................................|.................X.........X...XO.OXOXOX.XOX6X...X.....................................................................|.................XOX.....X.XOX.X..OXOXOXOXOXOXOX.XO..7.................................................................|...............X.XOXOX.X.XOXOXOX..O.OXOXOXO.O.OXOXO..XO................................................................|.......________XOXOXOXOX4XOXOXO_____5XOXOX____OXOXO__XO________________________________________________________________________........XOXO.O.OXO.OXO.......O.O.O.....OXOXOX.XO................................................................|...............XOX....O...OX..................O.OXOXOXO................................................................|.......X.......XO.........OX....................OXOXOXO................................................................|.......XO......X..........O.....................OXO.O.OX...............................................................|.......XO______X________________________________O_____OXO____X_________________________________________________________________XO..X...X......................................O.O....X8................................................X.......|.......XO..XO..3........................................O....XO................................................XO......|.......1OX.2O..X........................................O....XO........X.X.....................................XO......|........OXOXOX.X........................................O....XO........XOXO....................................XO......|......._O_OXOXOX________________________________________OX___XO________XO_OX___________________________________XOX_____________...O.O.O.........................................OXO..XO......X.X..OX9..................................XOXO....|........................................................OXO..XO......XOX..OXO................................X.XOXO....|........................................................OXOX.XOX.....XO...O.O..X.............................XOXCXO..X.|........................................................OXOXOXOXOX.X.X......O..XO............................XOXOXO..XO|......._________________________________________________OXOXOXOXOXOXOX______OX_XOX___________________________XOXOXOX_XOX_______.................................................OXOXOXOXOXOXOX......OXOXOXO..........................XOXO.OXOXO1OX.X....................................................O.OXOXOXOXOXOX......OXOXOXO............X.....X.......XO...OXOXOXOXOXOX....................................................O.OXO.O.OXO.......OXO.OXO............XOX...XOX.X.X.X....O.O.OXOXOXOXO.....................................................OX....O.........OX..O.OX.........X.XOXO..XOXOXOXOX........OXO.OXOXO_____________________________________________________O_______________OX____OXO________XOXO_OX_XOXO_OXOX________O___OXO_O.....................................................................O.....OXOX.X.X...XOX..OXOBOX..O.O..........|..O...O...........................................................................OXOXOXOXOX.XO...O.O.O................|..................................................................................O.OXOXOXOXOX.........................|....................................................................................OXO.OAO.OX.........................|......._____________________________________________________________________________O___O___OX_________________________________.....................................................................................OX.........................|............................................................................................OX.........................|............................................................................................OX.........................|............................................................................................OX.........................|......._____________________________________________________________________________________OX_________________________________.....................................................................................OX.........................|.......-------------------------------------------------------------------------------------O--------------------------0----------------------------------------------------------------------------------------------------------------------3-------
950940930920910900890880870860850840830820810800790780770760750740730720710700690680670660650640630620610600595590585580575570565
Analysis of trading EXL.LMinimum Reversal
2
Scale Type
Standard
Start Date
2002-01-01
End Date
2003-02-01
Strategy
S2iSSoSST12
Gross P&L
380
Trades
25
Stops hit
5143
The Complete Guide to Point-and-Figure Charting
Chart 3.18 – Swing trading, Reckitt Benckiser [RB.L]RB.L / 2 box rev, std2/ 2002.01.02 to 2002.12.091310 ________________________________________________________________________________________________________________________ 13101300 ........................................X............................................................................... 13001290 ........................................XO.............................................................................. 12901280 ........................................XO.............................................................................. 12801270 ........................................XOX............................................................................. 12701260 ________________________________________XOXO__________________________________________X_X_______________________________ 12601250 ........................................XOXO........................................X.XOXO.............................. 12501240 ................................X.....X.XOXO......................................X.XOXOXOX.............X............... 12401230 ................................XO....XO5OXOX.....................................XOXOXOXOXOX.X.........XO.............. 12301220 ..............................X.XOX.X.XOXOXOXO..X.X...........X...................XOXOXOXOXOXOXOX.......XO.............. 12201210 ______________________________XOXOXOXOXOXO_O_OX_XOXO__________XO________________9_XO_O_OXO_OXOXOXO______XO______________ 12101200 ..........................X...XO.OXOXOXOX....OX6XOXOX.........XO................XOX....O...OAOXOXOX.....XO.............. 12001190 ..........................XO..X..O.OXO.OX....OXOXO.OXO....X...XO..........X.X...XOX........O.OXOXOXO....XO..X........... 11901180 ..........................XO..X....O...O.....OXO...OXOX.X.X7..XO..........XOXO..XOX..........O.OXOXOX...XOX.XO.......... 11801170 ........................X.XO..X..............OX....OXOXOXOXOX.XO..........XOXO..XOX............OXOXOXOX.XOXOXO.......... 11701160 ________________X_______XOXOX_X______________O_____OXOXOXOXOXOXO__________XOXO__XOX____________OXOXOXOXOBOXOXO__________ 11601150 ................XO......XOXOXOX....................OXOXOXOXOXO.O..........XOXOX.XO.............OXOXO.OXO.OXOXOX.......X. 11501140 ................XOX.....XOX4XOX....................OXOXOXOXO...O........X.XO.OXOX..............OXOX..OX..O.OXOXO..X.X.XO 11401130 ................XOXO....XO.OXO.....................OXO.OXOX....O......X.XOX..OXOX..............OXOX..O.....O.O.OX.XOXOXO 11301120 ................XO3OX.X.X..O.......................O...OXOX....O......XOXOX..OXOX..............O.O.............OXOXOXOX. 11201110 ____________X_X_XO_OXOXOX______________________________OXOX____OX_____XOXOX__OXO_______________________________O_OXOCOX_ 11101100 ............XOXOX..O.OXOX..............................O.OX....OXO..X.XOXO...O...................................OXO.O.. 11001090 ......X.....XOXOX....O.O.................................O.....OXO..XOXOX........................................OX..... 10901080 ......XO....XOXOX..............................................OXO..XOXOX........................................O...... 10801070 ....X.XO..X.XO.O...............................................OXO..XOXO................................................ 10701060 ____XOXOX_XOX__________________________________________________OXO__X8X_________________________________________________ 10601050 ....XOXOXOXO...................................................OXO..XOX................................................. 10501040 ....XO.OXO.....................................................OXOX.XO.................................................. 10401030 X.X.X..O2......................................................OXOXOX................................................... 10301020 XOXOX..O.......................................................O.OXOX................................................... 10201010 XOXO_____________________________________________________________OXOX___________________________________________________ 10101000 1O...............................................................OXOX................................................... 1000990 .................................................................OXOX................................................... 990980 .................................................................OXOX................................................... 980970 .................................................................OXO.................................................... 970960 -----------------------------------------------------------------OX----------------------------------------------------- 960950 -----------------------------------------------------------------O------------------------------------------------------ 950
Analysis of trading RB.LMinimum Reversal
2
Scale Type
Standard
Start Date
2002-01-01
End Date
2003-02-01
Strategy
S2iSSoSST12
Gross P&L
346
Trades
28
Stops hit
7
144
Trading Applications
Chart 3.19 – Swing trading, Man [EMG.L]EMG.L / 2 box rev, std