Advantages of Point & Figure
- Unpopularity of the methodology provides an instant edge. Users of Point and Figure charts can see opportunities the vast majority of the market cannot. Alternatively, popular methods are so widely used, they have little effectiveness, markets are just not that easy!
- Discipline enforced. Investors only act when a signal is given. Point and Figure's mechanical rules eliminate trigger happy trading. As we all know, human nature struggles to follow rules and that can prove costly with respect to trading. Therefore, the mandatory rules are one of the biggest benefits of Point and Figure charting. Bar charts on the other hand, have no rules, and that introduces countless subjective possibilities.
- Patience imposed. With no box movement or signal, there is no call for action. There is no trading just for the thrill of it. Consequently, the perfect tool for long-term investing, remaining with the trend.
- Trader emotion contained. Buying or selling only occurs on a mechanical P&F signal and not on a feeling or mood. Likewise, providing no P&F signal is given, a morning news story is not going to persuade an investor to act.
- Subjective analysis eliminated. Very often the underlying cause of a losing trade is that of subjectivity, present at the time of entry. Of course, a subjective hunch is fine, providing a signal on the chart simultaneously provides the green-light.
- Objective by nature of its rules. Point and Figure principles, such as the 3 box reversal systen, keep trader's feelings in check.
- No arbitrary drawing of trendlines. The mechanical rules for drawing trendlines on Point and Figure charts ensures consistency. Compared to, bar and candle charts, where trendline positioning is subjective.
- Trendlines need only one point of contact on a P&F chart. Whereas, on a bar chart, trendlines are slow to appear since 2, or 3 points, of contact are required. Even then, the trendline may be drawn in a number of ways, fostering inconsistency on bar charts.
- Significant bands of support and resistance are clearly visible on a Point and Figure chart since noise is filtered out.
- Elimination of day-to-day noise ensures an investor is not wasting time and energy analyzing irrelevant price activity. Likewise, such information can contaminate, and cloud, price movement of value. Removal of noise is one of the major advantages of Point and Figure investing.
- Noise filtering may be fine tuned to suit an investor's strategy. For instance, simply increasing the box size or box reversal method, generates less signals. Fewer signals, yet greater reliability, is the key to successful long-term investing.
- Time is not a factor on a Point and Figure chart. Price is all that is important. The passage of time on a bar or candle chart can lead to hasty decisions. A P&F chart ensures no action until a signal is given. Hence, the approach is well suited to long-term investing.
- Buy and Sell Signals are clear cut. Breakouts and breakdowns are not debatable. However, a signal needs supporting evidence, also gleaned from the chart.
Disadvantages of Point & Figure
- Signal generation is dependant on box size scale and reversal method. Meaning, an adjustment in chart settings can determine whether a signal prints or not.
- Therefore, to ensure consistency across Point and Figure charts, it is imperative that the same effective box reversal method and scale, be applied across all charts. Definitely never adjust attributes to make a chart fit one's subjective view. At 3boXreversaL we use the same traditional, tried and tested, Chartcraft settings, across all charts.
- No volume on a Point and Figure chart. For example, a high volume test of support is of value to the chart analyst.
- Therefore, volume figures should be consulted elsewhere, perhaps from a resource such as yahoo finance, when additional evidence is needed.
- However, upside breakouts through resistance occur on light volume, just as often as they do on high volume. Light volume breakouts are often stronger since they are less trusted. That in turn, catches out traders. Therefore with respect to upside volume, the need to consult volume data is unnecessary.
- Point and Figure charting may be perceived as dull. Modern, fast paced, streaming bars or candles, with flashy graphics and colorful indicators, certainly appeals to younger investors. In comparison, Point and Figure charting may be perceived to be as much fun as watching paint dry. A P&F chart often goes days, even months, without movement.
- However, the slow to move trait, is more of a Point and Figure advantage, rather than a disadvantage of Point and Figure. No movement ensures an investor is not over-trading. Investments are only made when the appropriate signal is given. Hence, the perfect technique for long-term investing.
- Finally, learning the art of Point and Figure takes time! Mainstream methods, such as bar and candle charting are simple, quick and easy to learn, over just a few hours. However, as with many things in life, fast fixes, are invariably accompanied by poor quality. Therefore, the necessary learning curve is not a disadvantage of Point and Figure at all! We have made the learning process easier through our free tutorials, starting with the basics.
Benefits of Point and Fiugure by example
It is no coincidence that users of Point and Figure are mostly veteran investors. Experienced investors who have been there and tried that, with respect to the various charting methods.
Market veterans are typically long-term investors, with time horizons on the level of Warren Buffett. Veterans value the need to remain with the trend and that is one of the biggest advantages of Point & Figure charting. Anyone involved with markets has heard the "trend is your friend" line.
The trend is your friend
Above we have plotted a relative ratio between the SPDR Consumer Discretionary ETF and the S&P 500. The chart illustrates one of the greatest benefits of Point and Figure charting, in terms of infrequent, yet effective signals.
The ratio generated a buy signal in 2008. The bullish breakout, a Double Top, advised an investor that the consumer discretionary sector is an industry positioned to outperform. A long-term investor who followed that signal, would still be in holding the fund today, 11 years later. The signal remains in effect as of October 2019.
The consumer discretionary ETF case study is a great example of the durability of Point and Figure signals. A valuable signal mechanism for long-term investing. Additionally, the investor would have held their position since market noise is eliminated by the rules and principles of Point and Figure charting. Elimination of noise, daily volatility, is one of the major advantages of Point and Figure investing.
Furthermore, the P&F chart ensured an investor would not have sold out due to bad sentiment or negative news-flow. In the above example, there were no doubt a multitude of reasons to bail out of an investment in the fund. Fortunately, the P&F chart correctly advised otherwise, by virtue of its objective approach, one of the many benefits of Point and Figure charting.