UNDERSTANDING POINT AND FIGURE CHARTING

Tom Dorsey President of Dorsey, Wright & Associates

What is Point and Figure Charting? Point and Figure charting is a charting technique that records the movement of securities. The chart is made up of X and O columns as a result of price movements. X’s represent an increase in price, while O’s illustrate a decrease in price. What makes Point and Figure Charting special is that it does not take time into consideration as other charting techniques. Instead, Point and Figure charting only updates as price changes.

In a Point and Figure Chart, there are two types of columns. X column represents an increase of price movement while the O column shows a decrease of price movement. For example, let’s say Company XYZ’s stock price is at $50 dollars. We will plot an X on top of the previous X if the price exceeds the previous price. When the starting price of Company XYZ is at $50 then increased to $60, we will notice a long raising column of X’s. For a column of O’s to happen, a three box reversal needs to happen. If the following prices of the day went from $60 to $57, we need to create a new column of O’s at a price of $57. If the price continued downward, the O column will also continue downward. For O column to switch back to X column, a three point reversal needs to happen again. From our previous example, if prices go from $57 to $60, a new column of X at $60 would need to be created. For a “buy signal” to be given, the current X column has to exceed the last previous X column. For a “sell signal”, the current O column has to exceed the previous O column.

In addition to Point and Figure Charting here at Dorsey Wright & Associates, we use a concept called Relative Strength. Relative Strength is a concept of purchasing securities that have already outperformed the broad market benchmark or other securities.

When using Relative Strength comparison, investors will compare a security against a benchmark or other security.  Investors would divide a specific security price against the benchmark or other security’s price. If the new comparison price is on the X column, this means the specific security is outperforming the benchmark or other securities.If the comparison price is on O column, this represents the benchmark or other security outperforming the specific security. Investors can use this concept to pick which securities have the potential to outperform the broad market benchmark or other securities.

Dorsey, Wright & Associates (DWA) is an independent and privately owned registered investment advisory firm based in Richmond, Virginia. Our expertise is technical analysis based on Point and Figure Charting, Relative Strength Analysis, and other tools to analyze market data and deliver actionable insights.  For more information, visit www.DorseyWright.com to find out more information about Dorsey Wright & Associates’ research.