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POINT AND FIGURE LIBRARY
Do Not Trade Every Formation You See
Trading with the trend
Look at any point and figure chart and you will see a host of good signals. You will also see a number of buy or sell signals which start off well, but then reverse. This is typical. All that disequilibrium suggests is that the market will move in an unstable way until a new consensus is formed.
One of the most difficult aspects of point and figure charting is as follows: the chart gives a good buy signal and the share price moves up say 10 boxes (or units of value) from the base from which it has broken out. It then forms a new base. Then it breaks down. Should one sell, and if not, why not? Does every point & figure signal have equal validity?
The long-term or medium-term investor can use a point & figure chart simply as a means of his entry into a stock and then forget about it until he starts worrying about the price level on valuation grounds or until he has a return which is satisfactory. No such license is afforded the swing trader. Because the swing trader is usually leveraged, he cannot ignore adverse chart signals. What happens with a point & figure chart is that one seldom gets a long and sustained run without some worryingly negative chart pattern developing.
The answer to this problem, according to A.W. Cohen, was not to trade against the trend. Very sound advice. Michael Burke makes the matter crystal clear by declining to call the sell signal a sell signal if it occurs in an uptrend. He re-christens it a “down” signal.
Trend lines
But what is the trend? A.W. Cohen's answer was to draw a trend line. Not the trend line that you frequently see some people draw connecting a series of bottoms or tops but simply a mechanical 45° trend line. As long as a stock remains above the 45° line it was considered to be in an uptrend and any sell signal which occurred was to be ignored.
I agree one should only trade point & figure signals with the trend, but I don’t use trend lines. I determine the trend of the market by reference to my swing charts. You’ll have to buy the book to find out how!! Viewers should use whatever means of identifying the trend they feel most comfortable with.Choose the right security
Not all stocks give consistently reliable point & figure signals. Many low volatility stocks lumber on steadily. Every now and then they experience a bout of skittishness and they have a mini-sell off. That sell off breaches a support level on the chart, generating a sell signal, which turns out to be a trap or at least a dead end when investors nerves settle. These stocks represent excellent investments for buy and hold armchair investors, but murder for a swing trader. I don’t mean to suggest that every old economy stock is unsuitable for swing trading. Far from it. But you should back-test the chart of the security you wish to trade to see whether your point & figure trading tactics have had any success in the past.
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