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Point and Figure Charting: The Essential Application for Forecasting and Tracking Market Prices, 4th Edition

by Thomas J. Dorsey (2013)

Quick summary -- an in-depth PhD-level extended summary (10-30 pages) for this book is coming soon.

Point and Figure Charting: The Essential Application for Forecasting and Tracking Market Prices, 4th Edition

By Thomas J. Dorsey

Quick Summary

Thomas Dorsey provides a comprehensive guide to Point and Figure charting, a method of technical analysis that filters out minor price movements to focus on significant supply and demand shifts. The fourth edition covers the construction and interpretation of Point and Figure charts, pattern recognition, relative strength analysis, and the application of P&F methods to stocks, ETFs, and other securities. Dorsey demonstrates how this classic charting technique provides clear buy and sell signals while eliminating the noise that confounds other analytical methods.

Executive Summary

"Point and Figure Charting" is the definitive guide to a charting methodology that has been used by market analysts for over a century. Thomas Dorsey, founder of Dorsey Wright & Associates, presents P&F charting as a powerful tool for identifying the underlying supply and demand dynamics that drive price movements. Unlike time-based charts (bar charts, candlesticks), P&F charts record price changes only when they meet a predetermined threshold, filtering out insignificant price noise. The fourth edition updates the methodology for modern markets and includes applications to ETFs, sector analysis, and portfolio management.

Core Thesis

Point and Figure charting provides the clearest representation of supply and demand dynamics by eliminating the noise of minor price fluctuations and the distortion of time-based charting. By focusing exclusively on significant price changes, P&F charts generate unambiguous buy and sell signals based on well-defined patterns. Combined with relative strength analysis, P&F charting provides a complete framework for security selection and portfolio management.

Key Concepts and Terminology

  • X's and O's: X columns represent rising prices (demand); O columns represent falling prices (supply)
  • Box Size: The minimum price change required to record a new X or O
  • Reversal Amount: The number of boxes in the opposite direction required to start a new column
  • Double Top/Bottom: Classic P&F buy and sell signals
  • Relative Strength: Comparing a security's performance to a benchmark to identify leaders and laggards
  • Bullish/Bearish Percent Index: A market breadth indicator based on P&F signals across a universe of securities

Practical Applications

  1. Use P&F charts to generate clear, unambiguous buy and sell signals
  2. Apply relative strength analysis to select the strongest securities within the strongest sectors
  3. Use the Bullish Percent Index to gauge overall market conditions
  4. Set price objectives using horizontal and vertical count methods
  5. Filter the universe of investable securities to focus on those with P&F buy signals and strong relative strength

Critical Assessment

Dorsey's treatment is comprehensive and well-organized. The P&F methodology offers genuine advantages in clarity and noise reduction. However, the method can lag fast-moving markets because significant price changes must occur before signals are generated. The book also functions partly as marketing for Dorsey Wright's research service, though this does not significantly diminish its educational value.

Conclusion

"Point and Figure Charting" is the definitive resource on P&F methodology and provides a clear, disciplined framework for technical analysis that many traders find superior to time-based charting methods.