Point and Figure Charts
A prominent method of stock technical analysis in the 1960’s that has not
been as widely-followed since, Point & Figure technical analysis actually
dates its roots all the way back to the late 1800’s and Charles Dow, founder
of the Dow Jones Company. Around the turn of the 20th Century, many savvy
investors started to realize that certain stock patterns repeated
themselves; as a result, point and figure analysis evolved as a simple,
logical way to record share price movements.
Sample Point and Figure Chart
In fact, this is precisely the purpose of point & figure analysis—to produce charts that are logical, clear and simple to read. Consider the way a leading expert describes P & F’s rationale:
“The premise of Point & Figure charting is to provide a logical, organized and sensible way of recording the supply and demand relationship in any particular security or sector. When it is all said and done, if there are more buyers in a particular security than there are sellers willing to sell, the price will rise. On the other hand, if there are more sellers in a particular security than there are buyers willing to buy, then the price will decline. If buying and selling are equal, the price will remain the same. This is the irrefutable law of supply and demand. The same reasons that cause price fluctuations in produce such as potatoes, corn and asparagus cause price fluctuations in securities.” - from the book "Point and Figure Charting," by Tom Dorsey.
Tom Dorsey, it should be noted, is one of the founders of Dorsey Wright & Associates, a firm primarily dedicated to serving investment professionals and today’s leader in the point and figure methodology.
To review, the following are the key features of Point & Figure equity
Fundamentals can help answer the question of WHAT to buy and
technicals answer the question of WHEN to buy.
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