Foundations of Our Strategy: Point and Figure Basics

by | Mar 18, 2015 | Chart School, Podcasts, Technical Analysis

At Mullooly Asset Management, one of the foundations of our strategy is point and figure charting. Point and figure charting is a type of technical anaylsis that tracks security prices through columns of X’s and O’s. People successfully use other types of technical analysis to manage money, but we prefer point and figure because we find it clear and concise. We have a lot of respect for other types of technical analysis, but they’re just not our style. Much of our point and figure knowledge can be attributed to our friends at Dorsey Wright and Associates. Their research is invaluable, and we’ve learned a great deal from them. Tom Dorsey’s book, Point and Figure Charting, is required reading here at the office. We use the point and figure methodology to manage the risk in our clients’ investments.

We often discuss different aspects of point and figure on our weekly podcast. However, without visual examples, we’re worried that some of our listeners might be confused. Below I’ve linked to several educational point and figure videos that we’ve put together. If you’re a visual learner, I highly recommend you check them out.

Bullish Support Lines –
Double Top Buy Signals –
Double Bottom Sell Signals –
How Point and Figure Charts Work –

On this week’s podcast, Tom and I discuss the point and figure concepts covered in the above videos. We share basic attributes that we look for when scouting potential investment ideas.

The first thing we look at when evaluating a security’s point and figure chart is its trend. The bullish support line helps us determine this. When a security is trading above its bullish support line, it’s in a positive trend. When a security is trading below its support line, it’s in a negative trend. We usually tend to avoid investments in negative trends. That’s not to say money cannot be made in them, however you’re stacking the odds against yourself. We’re in the business of stacking the odds in your favor, so naturally that doesn’t tend to mesh.

Once we’ve identified the trend of a security, we’re then looking for buy signals and sell signals. A double top buy signal is when the current column of X’s, on a point and figure chart, exceeds the previous column of X’s. Conversely, a double bottom sell signal is when the current column of O’s exceeds the previous column of O’s. What do all these columns of X’s and O’s tell us? We’re really measuring supply and demand. It’s as simple as that. New buy signals tell us that demand is strong for the security. Strong demand means prices will rise. New sell signals tell us that demand is getting weaker and a growing supply exists. Weak demand means prices will fall. Very straightforward and concise.

Is that it?

Albert Einstein said that, “Everything should be made as simple as possible, but not simpler”. So while we’ve simplified the point and figure methodology to explain it here…no, that isn’t “it”. These basic concepts truly are part of our foundation at Mullooly Asset Management though. Looking for investments in positive trends that are on buy signals is a great place to start your process. It helps us weed out investments where the odds are stacked against us. From there we let another foundation of our strategy, relative strength, guide the process. More on that another time though!

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