Measuring Rate of Change (ROC)
posted under
Philosophy of Technical Analysis
by ceecabolos
Three point reversal charts allow the use of two different measuring techniques—the horizontal and the vertical. For the horizontal, count the number of columns in a bottom or topping pattern. That number of columns must then be multiplied by the value of the reversal or the number of boxes needed for a reversal. For example, let's assign a $1.00 box value to a chart with a 3 box reversal. We count the number of boxes across a base and come up with 10. Because we're using a 3 box reversal, the value of that reversal is $3.00 (3x$1.00). Multiply the 10 columns across the base by $3 for a total of $30. That number is then added to the bottom of the basing pattern or subtracted from the top of a topping pattern to arrive at the price objective.
The vertical count is a bit simpler. Measure the number of boxes in the first column of the new trend. In an uptrend, measure the first up column of x's. In a downtrend, measure the first down column of o's. Multiply that value by 3 and add that total to the bottom or subtract it from the top of the column. What you're doing in effect with a 3 box reversal chart is tripling the size of the first leg. If a double top or bottom occurs on the chart, use the second column of o's or x's for the vertical count.
TRADING TACTICS
Let's look at the various ways that these point and figure charts can be used to determine specific entry and exit points.
1. A simple buy signal can be used for the covering of old shorts and/or the initiation of new longs.
2. A simple sell signal can be used for the liquidation of old longs and/or the initiation of new shorts.
3. The simple signal can be used only for liquidation purposes with a complex formation needed for a new commitment.
4. The trendline can be used as a filter. Long positions are taken above the trendline and short positions below the trendline.
5. For stop protection, always risk below the last column of o's in an uptrend and over the last column of x's in a downtrend.
6. The actual entry point can be varied as follows:
a. Buy the actual breakout in an uptrend.
b. Buy a 3 box reversal after the breakout occurs to obtain a lower entry point.
c. Buy a 3 box reversal in the direction of the original breakout after a correction occurs. Not only does this require the added confirmation of a positive reversal in the right direction, but a closer stop point can now be used under the latest column of o's.
d. Buy a second breakout in the same direction as the original breakout signal.
As you can readily see from the list, there are many different ways that the point and figure chart can be used. Once the basic technique is understood, there is almost unlimited flexibility as to how to best enter and exit a market using this approach.
Adjusting Stops
The actual buy or sell signal occurs on the first signal. However, as the move continues, several other signals appear on the chart. These repeat buy or sell signals can be used for additional positions. Whether or not this is done, the protective stop point can be raised to just below the latest o column in an uptrend and lowered to just over the latest x column in a downtrend. This use of a trailing stop allows the trader to stay with the position and protect accumulated profits at the same time.
inal up trendline is simply too far away from the price action. In that case, a tighter trendline should be drawn in an attempt to arrive at a "best fitting" support line.
MEASURING TECHNIQUES
Three point reversal charts allow the use of two different measuring techniques—the horizontal and the vertical. For the horizontal, count the number of columns in a bottom or topping pattern. That number of columns must then be multiplied by the value of the reversal or the number of boxes needed for a reversal. For example, let's assign a $1.00 box value to a chart with a 3 box reversal. We count the number of boxes across a base and come up with 10. Because we're using a 3 box reversal, the value of that reversal is $3.00 (3x$1.00). Multiply the 10 columns across the base by $3 for a total of $30. That number is then added to the bottom of the basing pattern or subtracted from the top of a topping pattern to arrive at the price objective.
The vertical count is a bit simpler. Measure the number of boxes in the first column of the new trend. In an uptrend, measure the first up column of x's. In a downtrend, measure the first down column of o's. Multiply that value by 3 and add that total to the bottom or subtract it from the top of the column. What you're doing in effect with a 3 box reversal chart is tripling the size of the first leg. If a double top or bottom occurs on the chart, use the second column of o's or x's for the vertical count. (See Figure 11.12.)
TRADING TACTICS
Let's look at the various ways that these point and figure charts can be used to determine specific entry and exit points.
1. A simple buy signal can be used for the covering of old shorts and/or the initiation of new longs.
2. A simple sell signal can be used for the liquidation of old longs and/or the initiation of new shorts.
3. The simple signal can be used only for liquidation purposes with a complex formation needed for a new commitment.
4. The trendline can be used as a filter. Long positions are taken above the trendline and short positions below the trendline.
5. For stop protection, always risk below the last column of o's in an uptrend and over the last column of x's in a downtrend.
6. The actual entry point can be varied as follows:
a. Buy the actual breakout in an uptrend.
b. Buy a 3 box reversal after the breakout occurs to obtain a lower entry point.
c. Buy a 3 box reversal in the direction of the original breakout after a correction occurs. Not only does this require the added confirmation of a positive reversal in the right direction, but a closer stop point can now be used under the latest column of o's.
d. Buy a second breakout in the same direction as the original breakout signal.
As you can readily see from the list, there are many different ways that the point and figure chart can be used. Once the basic technique is understood, there is almost unlimited flexibility as to how to best enter and exit a market using this approach.
Adjusting Stops
The actual buy or sell signal occurs on the first signal. However, as the move continues, several other signals appear on the chart. These repeat buy or sell signals can be used for additional positions. Whether or not this is done, the protective stop point can be raised to just below the latest o column in an uptrend and lowered to just over the latest x column in a downtrend. This use of a trailing stop allows the trader to stay with the position and protect accumulated profits at the same time.
What to Do After a Prolonged Move
Intermittent corrections against the trend allow the trader to adjust stops once the trend has resumed. How is this accomplished, however, if no 3 box reversals occur during the trend? The trader is then faced with a long column of x's in an uptrend or o's in a downtrend. This type of market situation creates what is called a pole, that is, a long column of x's and o's without a correction. The trader wants to stay with the trend but also wants some technique to protect profits. There is at least one way to accomplish this. After an uninterrupted move of 10 or more boxes, place a protective stop at the point where a 3 box reversal would occur. If the position does get stopped out, reentry can be done on another 3 box reversal in the direction of the original trend. In that case, an added advantage is the placement of the new stop under the most recent column of o's in an uptrend or over the latest column of x's in a downtrend.ADVANTAGES OF POINT AND FIGURE CHARTS
Let's briefly recap some of the advantages of point and figure charting.
1. By varying the box and reversal sizes, these charts can be adapted to almost any need. There are also many different ways these charts can be used for entry and exit points.
2. Trading signals are more precise on point and figure charts than on bar charts.
3. By following these specific point and figure signals, better trading discipline can be achieved.P&F TECHNICAL INDICATORS
In his 1995 book, Point & Figure Charting Uohn Wiley & Sons), Thomas J. Dorsey espouses the Chartcraft method of 3 point reversal charting of stocks. He also discusses point and figure application to commodity and options trading. In addition to explaining how to construct and read the charts, Dorsey also shows how the P&F technique can be applied to relative strength analysis, sector analysis, and in the construction of an NYSE Bullish Percent Index. He shows how p&f charts can be constructed for the NYSE advance decline line, the NYSE High-Low Index, and the percentage of stocks over their 10 and 30 week averages. Dorsey credits Michael Burke, the publisher of Chartcraft, (Chartcraft, Inc., Investors Intelligence, 30 Church Street, New Rochelle, N.Y. 10801) with the actual development of these innovative p&f indicators which are available in that chart service.
The vertical count is a bit simpler. Measure the number of boxes in the first column of the new trend. In an uptrend, measure the first up column of x's. In a downtrend, measure the first down column of o's. Multiply that value by 3 and add that total to the bottom or subtract it from the top of the column. What you're doing in effect with a 3 box reversal chart is tripling the size of the first leg. If a double top or bottom occurs on the chart, use the second column of o's or x's for the vertical count.
TRADING TACTICS
Let's look at the various ways that these point and figure charts can be used to determine specific entry and exit points.
1. A simple buy signal can be used for the covering of old shorts and/or the initiation of new longs.
2. A simple sell signal can be used for the liquidation of old longs and/or the initiation of new shorts.
3. The simple signal can be used only for liquidation purposes with a complex formation needed for a new commitment.
4. The trendline can be used as a filter. Long positions are taken above the trendline and short positions below the trendline.
5. For stop protection, always risk below the last column of o's in an uptrend and over the last column of x's in a downtrend.
6. The actual entry point can be varied as follows:
a. Buy the actual breakout in an uptrend.
b. Buy a 3 box reversal after the breakout occurs to obtain a lower entry point.
c. Buy a 3 box reversal in the direction of the original breakout after a correction occurs. Not only does this require the added confirmation of a positive reversal in the right direction, but a closer stop point can now be used under the latest column of o's.
d. Buy a second breakout in the same direction as the original breakout signal.
As you can readily see from the list, there are many different ways that the point and figure chart can be used. Once the basic technique is understood, there is almost unlimited flexibility as to how to best enter and exit a market using this approach.
Adjusting Stops
The actual buy or sell signal occurs on the first signal. However, as the move continues, several other signals appear on the chart. These repeat buy or sell signals can be used for additional positions. Whether or not this is done, the protective stop point can be raised to just below the latest o column in an uptrend and lowered to just over the latest x column in a downtrend. This use of a trailing stop allows the trader to stay with the position and protect accumulated profits at the same time.
inal up trendline is simply too far away from the price action. In that case, a tighter trendline should be drawn in an attempt to arrive at a "best fitting" support line.
MEASURING TECHNIQUES
Three point reversal charts allow the use of two different measuring techniques—the horizontal and the vertical. For the horizontal, count the number of columns in a bottom or topping pattern. That number of columns must then be multiplied by the value of the reversal or the number of boxes needed for a reversal. For example, let's assign a $1.00 box value to a chart with a 3 box reversal. We count the number of boxes across a base and come up with 10. Because we're using a 3 box reversal, the value of that reversal is $3.00 (3x$1.00). Multiply the 10 columns across the base by $3 for a total of $30. That number is then added to the bottom of the basing pattern or subtracted from the top of a topping pattern to arrive at the price objective.
The vertical count is a bit simpler. Measure the number of boxes in the first column of the new trend. In an uptrend, measure the first up column of x's. In a downtrend, measure the first down column of o's. Multiply that value by 3 and add that total to the bottom or subtract it from the top of the column. What you're doing in effect with a 3 box reversal chart is tripling the size of the first leg. If a double top or bottom occurs on the chart, use the second column of o's or x's for the vertical count. (See Figure 11.12.)
TRADING TACTICS
Let's look at the various ways that these point and figure charts can be used to determine specific entry and exit points.
1. A simple buy signal can be used for the covering of old shorts and/or the initiation of new longs.
2. A simple sell signal can be used for the liquidation of old longs and/or the initiation of new shorts.
3. The simple signal can be used only for liquidation purposes with a complex formation needed for a new commitment.
4. The trendline can be used as a filter. Long positions are taken above the trendline and short positions below the trendline.
5. For stop protection, always risk below the last column of o's in an uptrend and over the last column of x's in a downtrend.
6. The actual entry point can be varied as follows:
a. Buy the actual breakout in an uptrend.
b. Buy a 3 box reversal after the breakout occurs to obtain a lower entry point.
c. Buy a 3 box reversal in the direction of the original breakout after a correction occurs. Not only does this require the added confirmation of a positive reversal in the right direction, but a closer stop point can now be used under the latest column of o's.
d. Buy a second breakout in the same direction as the original breakout signal.
As you can readily see from the list, there are many different ways that the point and figure chart can be used. Once the basic technique is understood, there is almost unlimited flexibility as to how to best enter and exit a market using this approach.
Adjusting Stops
The actual buy or sell signal occurs on the first signal. However, as the move continues, several other signals appear on the chart. These repeat buy or sell signals can be used for additional positions. Whether or not this is done, the protective stop point can be raised to just below the latest o column in an uptrend and lowered to just over the latest x column in a downtrend. This use of a trailing stop allows the trader to stay with the position and protect accumulated profits at the same time.
What to Do After a Prolonged Move
Intermittent corrections against the trend allow the trader to adjust stops once the trend has resumed. How is this accomplished, however, if no 3 box reversals occur during the trend? The trader is then faced with a long column of x's in an uptrend or o's in a downtrend. This type of market situation creates what is called a pole, that is, a long column of x's and o's without a correction. The trader wants to stay with the trend but also wants some technique to protect profits. There is at least one way to accomplish this. After an uninterrupted move of 10 or more boxes, place a protective stop at the point where a 3 box reversal would occur. If the position does get stopped out, reentry can be done on another 3 box reversal in the direction of the original trend. In that case, an added advantage is the placement of the new stop under the most recent column of o's in an uptrend or over the latest column of x's in a downtrend.ADVANTAGES OF POINT AND FIGURE CHARTS
Let's briefly recap some of the advantages of point and figure charting.
1. By varying the box and reversal sizes, these charts can be adapted to almost any need. There are also many different ways these charts can be used for entry and exit points.
2. Trading signals are more precise on point and figure charts than on bar charts.
3. By following these specific point and figure signals, better trading discipline can be achieved.P&F TECHNICAL INDICATORS
In his 1995 book, Point & Figure Charting Uohn Wiley & Sons), Thomas J. Dorsey espouses the Chartcraft method of 3 point reversal charting of stocks. He also discusses point and figure application to commodity and options trading. In addition to explaining how to construct and read the charts, Dorsey also shows how the P&F technique can be applied to relative strength analysis, sector analysis, and in the construction of an NYSE Bullish Percent Index. He shows how p&f charts can be constructed for the NYSE advance decline line, the NYSE High-Low Index, and the percentage of stocks over their 10 and 30 week averages. Dorsey credits Michael Burke, the publisher of Chartcraft, (Chartcraft, Inc., Investors Intelligence, 30 Church Street, New Rochelle, N.Y. 10801) with the actual development of these innovative p&f indicators which are available in that chart service.
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