Tuesday, October 11, 2011

Point and Figure Charts

Nikhil asks “do you follow Point and Figure charts also? Did you try this type? what's your experience? with them?
Are not they less 'noisy' than normal bar/candlesticks charts?”

My Notes: Since this a question that I can answer easily, I picked it up for a reply as soon as I read it.

All technical tools work as promised provided the trader follows the tools, consistently. Then, point and figure charts are as good or as bad as most other technical methods. The skill lies with the trader.

I do not track point and figure charts. I have experimented with them earlier. I realized that I was comfortable with standard O_H_L_C charts and classical chart patterns. Point and figure charts also have their own pattern recognition methods.  Any one method of analysis is good enough.

Point and figure charts have a distinct disadvantage, which was not so much of an issue earlier,  but is now a clear drawback. These charts do not show gaps. Thus, overnight gaps are not visible. For intraday or even swing traders who use intraday charts, this becomes a major problem. Twenty years ago, intraday trading was not popular so the issue of gaps was not important. Now, if you are any kind of intra day trader , I cannot understand how you can use point and figure charts for such trading.

Reader comments are welcome.

5 comments:

Pi said...

i see this often and continue to see it even with traders with a few years of work experience - this notion of believing in or finding the right or correct charting pattern, or right indicator, or indicator variables or chart type etc etc. They make these things their god and worship them in their trading. I have a friend who is such a blind believer of stochastics and macd on weekly charts..

Step back from your search for that perfect indicator and think of it. Essentially most ppl use these indicators or patterns to look for reversals or start of new trends, because everyone would like to get long at near the bottom or short at the top. But let me tell you, that is the tougher thing. And even when you will catch the top or bottom, you will never hold your positions thru a large portion of the new trend.

On the other hand, its much easier to just trade moves within the context of the bigger trend. Don't look for reversals, look for continuations. And thus you will find that pullbacks in these trends will never happen in the same way at times they will be shallow, at times deep, at times consolidation in a range instead of a pullback etc etc. Thus no matter what your perfect indicator or chart pattern says, there will always be room for error. But look for continuation of existing trends and 60-70% of the time you shall be correct (especially in trending markets). If you now keep your risk reward skewed at 2:1 or more, there is no way you will not make money.

Its quite a simple thing. You just need to decide whether you want to be right or make money. Whether you want to say "yes, i caught a top/bottom, but sadly didn't make much money cause I didn't hold long enough" or "I didn't buy at the bottom or sell at the top, but made lots of money in between"

unnamed said...

Sir,
Thanks for your excellent insights in your blog.

How does one start and become a full time trader for a living .

What are the steps and requirements .

Would be obliged if you could guide how to start and become a successful and profitable trader and earn a living.

Thanks in advance,

Rajaram

Nirav said...

Sir,

Is only trading can be a source of income or one must have other stable source of income along with trading?

Please reply.

GA said...

Dear SS,
V shaped recovery will not sustain, is something techs believe in. Though we need to wait and see the next few days for the result, how will you explain the recovery of Jublfood - 5 big red candles, 1 almost a doji and 4 big green candles - heavy volume.

Thanks for your time
Gopal

Nikhil said...

Thank you for the reply and useful insights :)