E-Mini Point and Figure

Discussion in 'Index Futures' started by brad1970, Sep 17, 2002.

  1. brad1970


    Thanks for everyone providing help on my Pivot Points question.

    Next question. Is there anyone that uses point and figure charts to determine S&R, Trends, and overall Supply and Demand, along with traditional candlestick charts?

  2. I use PnF, but not candelsticks.

    I'm fairly new to short term trading and although i trade a little now, i'm still in the process of determining my exact "sytem" for what siganls i will take, and where my entry points should be.
  3. Brad, somewhere on this link is a study from Purdue University stating 80% hit rate with point and figure. If you find it and read it let me know.


    Blew up my own personal Corn account back when, trading point and figure, so it has been around a long time. Like the guy told me, "Now this is going to be very stressful. It's going to take a commitment."
  4. In my opinion, P&F is very good for less volatile stocks, not for the Nasdaq bunch. I mostly use it to identify support and resistance for a mid / long term swing, as well as calculating targets, however, it's a bit harder in a sideway market.

    Cheers !!! :)
  5. That Purdue study is no longer valid.

    Here's an excerpt written by Michael Burke of Chartcraft, the authority on Point and Figure.

    The full article is available at http://www.chartcraft.com under "Blast from the Past" in the stocks section and I highly recommend it.

    "Triple Tops, Triple Bottoms and Bull and Bear Traps

    Darvas formulated a system called "boxes" in which he "charted" the consolidation patterns of stocks making new highs.

    His basic plan was to buy stocks with stop losses below the consolidation level. This was all very much like Point and Figure charting. His greatest success in the late 1950's came with spectacular up moves in stocks like those already mentioned: Thiokol, which, along with the space and technology sectors, rose on the launch of Sputnik by the Russians; and E L Bruce which soared when the short sellers were "cornered". These huge successes came about largely because he rode these big winners until he was stopped out.

    Two things happened after that. The first was that people started to use stop losses and to use Buy Stop Orders to buy, creating a system where a lot of people were willing to buy higher on the upside breakout and sell lower on the downside breakout a la Darvas. The second was that during the 1950's the volume of trading began its inexorable shift from individuals to institutions.

    A study, 'Profits and Profitability', was made about the trading done in the late 1950's and early 1960's by Professor Robert Earl Davis of Purdue University. In this book, Davis attempted to measure the reliability of different signals on Point and Figure charts. His conclusions were that Triple Top breakouts in Bull Markets were profitable 87.9% of the time for an average gain of 28.7% in 6.8 months and Triple Bottom breakouts were profitable 93.5% of the time in Bear Markets for an average gain of 23.0% in just 3.4 months. These statistics were published in A.W. Cohen's book 'How to use the Three Point Reversal Method of Point and Figure Trading' from the late 1960's and again in Tom Dorsey's 1995 book 'Point and Figure Charting'.

    Although I do believe that Triple Tops and Triple Bottom formations were reliable overall I always believed that these statistics were way out of line because, if they were right, it wouldn't take long for anyone just using Triple Top and Triple Bottom breakouts to become one of the wealthiest people in the country. Davis's claims were later discredited.

    When individuals did most of the trading it was not likely that many of them were in cahoots with the specialists. As institutions moved to the forefront, this was less likely and would lead to growth of the Bull Traps and the Bear Traps. Gradually the specialists and the institutions began to gang up on the Triple Top buyers and the Triple Bottom sellers. On reflection this is not a surprise when you think about it. If you and I are playing a game and I am always telling you my next move, but you are always telling me your next two moves, who do you think would win?

    So then Darvas' book "How I made $2 Million in the Market" vastly increased the popularity of stop losses and, coupled with a shift to institutions doing more and more of the trading, worked against the effectiveness of Triple Top and Triple Bottom breakouts, two of the most popular and obvious places for stop losses.

    The rationale behind a Triple Top breakout was that a stock would rally to a certain level, say $40, pull back to say $37, rally again up to $40, pull back again to $37 and then move up once more and break the three tops at $41. Behind this was the assumption that at the first highs at $40 the supply overcame the demand and the stock pulled back. On the third try the assumption was that demand had now overcome supply as the stock broke to new highs.

    In the changed world, however, the large sellers, with probable help from specialists, were aware that there were a lot orders to buy on stop at $41 from a combination of people who wanted to buy at that breakout level and from short sellers wanting to cut their losses. Thus, it was to the seller's advantage to hold back on their sales until $41 was hit where there was a lot of demand for the stock. When the stock "ran out of gas" at $41 and pulled back to $38, the Bull Trap was in place, demand did not overcome supply, the sellers just held back knowing they would get a higher price for the stock they wanted to sell.

    The same thing is true on the downside as Triple Bottoms are logical places for sellers to keep their stop losses and for short sellers to initiate their trades. The immediate upward reversal from the downside breakout level now becomes a Bear Trap to the detriment of those with their sell stops at the obvious levels.
  6. thanks big j, maybe that's why the only thing that ever works for me is something different.

    I'm about ready to start system rotational trading. That's where you divide all systems into 5 sectors. You trade the worst performing system until it becomes the best performing system and then you switch back to the worst performing system.

    Hey, if point and figure is discredited, that means it should probably start working pretty well pretty soon.
  7. Not Point and Figure, just a 93% sucess rate because a stock was hit a triple bottom during a bear market. That type of sucess rate is what is no longer valid.