The Visual Investor: How to Spot Market Trends, Second Edition

APPENDIX C

Point-and-Figure Charting

While candlesticks are the oldest form of charting in the world, point-and-figure (P&F) charts are the oldest form of charting in the United States. First developed near the end of the nineteenth century, P&F charts predate the better known bar chart by several years. After falling out of favor in the latter decades of the twentieth century, P&F charting has gained new popularity in recent years. A lot of the credit for that goes to the advent of computer charting and web sites such as StockCharts.com that have made P&F charts more accessible to the investing public and much easier to use. Although most investors still rely more heavily on traditional bar and line charts, P&F charts have enough unique qualities and advantages to recommend their use along with those other chart forms.

In my view, the two biggest advantages of point-and-figure charting are precision and simplicity. Buy and sell signals are very easy to spot and leave little doubt as to their existence. The P&F chart does that by recording successive X and O columns. The X column records rising prices while the O column shows falling prices. Trend signals are given when previous X or O columns are exceeded on the upside or the downside.

Figure C.1 shows the two simplest P&F signals called the double-top breakout and double-bottom breakdown. A double-top breakout shows the second rising X column exceeding the first rising X column. That buy signal describes a simple upside breakout ...