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Online Investing Hacks by Bonnie Biafore

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Hack #48. Point and Figure Charts

Resistance, support, and the direction of price action are easy to identify in point and figure charts once you learn to interpret them.

Growing from Charles Dow’s theories about supply and demand, point and figure (P&F) charts are easy to create and maintain even without a computer. In fact, P&F charts fell from favor when handheld calculators and home computers made other types of charts easier to produce. However, some P&F chart features have attracted renewed interest, particularly from intermediate-term traders. Although their appearance might be startling at first, P&F charts provide advantages over other charts, such as emphasizing the direction of price action, and making resistance and support levels easier to identify.

Although P&F charts have been applied to short-term trading, they are most appropriate for intermediate-term trading because their construction by definition removes short-term price fluctuations from the picture. Investors who use P&F charts can quickly determine the meaning of price activity and formulate trading decisions with a single glance. In a P&F chart, a stock or other tradable item shows either a buy or a sell signal—there is no middle ground. The P&F chart user can review many charts without reaching information overload or worrying about ambiguous chart patterns or price activity.

P&F charts work a bit differently from bar charts and candlestick charts. First, the X-axis doesn’t represent a fixed length of ...

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