Introduction:
PnF Chart, also known as Point and Figure Chart. The theories and literature etc. can be found out through several sources - Google, Right hand side section on
"Point and Figure Study Material". I would request readers to go through the basic stuffs of this method before starting on this journey. I shall talk here only about the subsequent stuffs I managed to learn post those basic stuffs.
Important thing to mention here is - it's a chart purely based on Demand & Supply equation. If there is demand and increasing demand, we keep on adding a cross- say Figure and if there is supply and increasing supply we keep on adding a dot(say Point) - called Figure.
Unlike other methods of charting this does not have any other indicator except price. But the depth of this technique is that a built-in support and resistance are there in the construct of the chart. A reversal in direction of the movement does not happen until certain level of resistance or support is broken. We will talk in details about this concept when we get into the technical details of the charting method.
The popularity of this method is in its simplicity. It can help one in following the trend, identify the reflection points, channel support / resistance. However, where it scores much higher than other methods in its ability to predict the Target Price Objective (TPO or PO). A "head & shoulder" method or a "contracting triangle" or many such technical patterns also give the probable target. But the difficulty is if those patterns are not formed we are really not sure of the target. In case of PnF method this problem does not happen. Because, it predicts the TPO based on accumulation in the support line or distribution in the resistance line.
This method existed for a longer period of time in vogue, because one could construct this chart without the help of even a computer. All one needs is a graph paper and keep plotting. Even today many people use it with great success.
As today's market is very complex and getting more complex day by day with participation from all section of people. Almost all the business houses come to market for "risk-free-return"! Of-course we have those big investment bankers, mutual funds, the big-bulls & bears (and they include the media buffs also). On top of count those computer whiz who are great in manipulating the price points and create "spike-heel tension"! So, some play with money power, some with
However, all of them have one motive in common - to make money. And that's put the balance back into the game. We find "pattern in randomness". All we poor souls of the game got to do is to understand the fundamental of the game and stick to the basics. Simultaneously, as the rules of the game change, we need to adapt to it quickly. But remember the basics of the game remain the same.
The above paragraph might sound like a bit of Knowledge session. But that was a prologue to subsequent two paragraphs where I talk about why we find PnF method often failing to live up to the promise.
There is nothing in the method that will fail. It's actually our understanding and interpretation using this method that fails! What I mean here is that may be a particular pattern has been working fine for so long but a few instances we notice that suddenly it's not working the way it did last time. Like any other TA (Technical Analysis) method, it always comes with two options - UP side and DOWN side. The probability of the same could vary depending upon the cart type, but it will always exist! That's where it starts failing. Because, often we fail to accept that the other side always existed.
Though a built-in buffer exists, it often can give whipsaws like other TA methods. But, one thing can be definitely vouched for that the number of whipsaws are much less compared to other methods. As the depth of reversal is quite large in this method, a highly-leveraged position is not that suitable under this method. What it means is that holding pure cash (equities) is much more comfortable compared to a derivative (F&O) position.
Another big problem with this method that there is no time dimension to it. Though one can mark the same with a change in color or some other notation but that's only for identification purpose. The basics of the chart really don't talk about time. So taken a position we really don't know when we reach there.
In the next section, we will talk about the technical aspect of this method. Next to that we shall discuss about the application and nuances of the same. Your inputs or comments will be highly appreciated. With my limited knowledge on the subject, I shall invite comments / write-ups from the pros who can share more on these topics.
