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Readers reviews of Point and Figure Charting, Second Edition

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The market is about supply and demand. When supply dominates demand the price of a stock falls. When demand dominates supply, prices rise as many buyers chase a handful of available shares. This is the basic dynamic of the market. Unfortunately it was very easy to forget this in the stampede of recent bull markets. Some traders haven’t even remembered these relationships in the current bearish conditions, so they still hold onto stock that nobody wants and watch the price tick lower.

 

Because we have been bombarded with so many technical indicators constructed from complex mathematical algorithms which are now easily available on our screens at the click of a button, it has been tempting to forget the market basics of supply and demand. Thomas Dorsey’s book, Point and Figure Charting is a welcome and timely reminder of what underpins market activity.

 

The essence of point and figure charting is the way it captures the balance of demand and supply. It doesn’t use fancy mathematics. Instead it uses techniques that were developed when Charles Dow was active in the market. Dorsey provides the basic construction rules for point and figure charts. Instead of pages of mathematics he provides a five step flow diagram that tells you where to put an X to record rising prices, and where to put an O to record falling prices. The strength of supply and demand is fully recorded in the columns of X’s and O’s.

 

While point and figure charts are relatively easy to construct, they are a little more difficult to interpret. Dorsey guides the reader through the basics of double tops, reversal patterns, trend lines and other chart patterns. These analysis tools can be applied to any stock, or any commodity, or futures contract. Master these tools and you have a tool which will crack open the demand and supply equation in any market.

If Dorsey provided a clear guide to just the classic application of point and figure then the book would be worth buying. However, Dorsey shifts the application of point and figure charts to markets beyond those created by individual stocks and their price behaviour. This is the really interesting material which has been updated in the light of research and experience since the publication of the first edition of this book.

 

If a point and figure chart exposes the balance of supply and demand, then it can be applied to any situation where there is a balance of supply and demand. This includes the secondary indicators used by both technical and fundamental analysts. These are generally sentiment indicators and include relative strength analysis applied to stocks and sectors, as well as new high-new low indicators and bullish percent calculations. All of these indicators map the balance of supply and demand. By applying point and figure analysis, the trader is able to extract even more detailed information about the current balance and the way changes are building which may alter that balance.

 

Once we accept that point and figure is a valid analysis method for the raw data that makes up these secondary indicators then we can shift focus to associated markets like bonds and OTC instruments. Dorsey brings together these concepts as he examines options and exchange traded funds. Nothing is immune from the revealing impact of point and figure analysis. Demand and supply relationships are quickly revealed. Many traders will find these advanced applications the most interesting addition to their knowledge of point and figure charting.

 

The novice will also find the book an excellent introduction to and guide through, the basics of point and figure charting. I use point and figure charting in all my trading analysis. Dorsey has provided some new areas where I can apply my old skills and find new opportunities.

 

 

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