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Point and Figure Charts

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Point and figure charts display predetermined price changes, which indicate the overall direction of prices. Point and figure charts, which differ from bar charts in a number of ways, record only significant changes in the stock price. Significant is defined by the analyst drawing up the chart. For higher-priced stocks (more than \$50, for example), a 2-point difference might activate the recording of the price (see Figure 11–3). For lower-priced stocks, the difference might be 1 point. The second major difference between point and figure charts and other charts is that neither time nor trading volume is important. This type of chart is used to draw attention to emerging price patterns.

The first step in the construction of a point and figure chart is to determine the price movements you consider to be significant. For a high-priced stock in the hundreds of dollars, 3 to 5 points may be appropriate, whereas a stock in the \$10 price range might have a 0.5 to 1 point differential. Assuming that the analyst has decided on 2 points for a stock in the \$50 price range, the changes in price are plotted according to these guidelines:
* An X is inserted on the chart when the price of the stock advances by at least 2 points.
* An O is inserted when the stock declines by at least 2 points. For example, the following prices result in the point and figure chart shown in Figure 11-3:

Figure 11-3
Point and Figure Chart

To begin drawing this chart, the first X at \$50 is plotted. The next two entries in the first week (51 and 511⁄2) are ignored because they are less than the \$2 stock price differential. The second X is placed at \$52 to show the increase in the stock price to \$521⁄4, whereas the next day’s stock price of \$523⁄4 is ignored.

In the second week, the stock price falls to \$50, which necessitates putting the letter O (to signify a price decline) next to \$50 in the second column. A second O is inserted at \$48 to show the greaterthan- 2-point decline to \$473⁄4, followed by a third O when the price falls to \$46 per share. The third column shows the price increases to \$48, \$50, and higher than \$52. Each time the stock advances by \$2, an X is inserted, and when the stock price falls by \$2, an O is inserted. Thus a point and figure chart shows, at a glance, price changes. Stock prices beyond the third week are plotted, and a downward trend line emerges. Technical analysts would view the penetration (the upward crossing) of the downward trend line as a buy signal.

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