Wednesday, November 17, 2010

PnF Chart My 0.2 Cent Review - Part II (A)

In the introductory part, so far we have seen why and why not PnF. Let me recapitulate the same again.
Why -
  • Simple
  • Less technology and technical involved
  • Less whipsaws as in-built filter exists
  • Recommended for medium to long-term investment analysis
Why not - 
  • Short-term analysis difficult
  • No time-frame can be theoretically associated with this method
  • Leverage positions are difficult to manage without deep pocket
In-spite of that, I have been trying to analyze 'Nifty' through this method for last few quarters.I would say, I have been 60-70 % successful in this attempt. While in Jul'10 - Sep'10, Nifty played prolonged range bound movement of some mere 200 points and was finding difficult to break past 5550, in one of those analysis my chart reading suggested 5800. (http://niftypointandfigure.blogspot.com/2010/09/nifty-point-figure-pnf-analysis-week.html). Almost nobody talked about 250 points break-out at that point. I too was skeptical, but the chart reading suggested so. I shall show in following discussions, what made me say so! All this I am saying is to advocate that a simple chart reading mechanism like PnF can also be immensely helpful - only thing those 30% failure should not embroil us into negative thinking and discard the mechanism. Well enough advocacy, let's get onto the tough act - Understand, Analyze and Act.

Understand

In this section we will understand the philosophy under which it came into picture. But before this it's worth to thank those great people who gave birth to and nurtured such a wonderful system. A little about them.
Read History section in this link: http://en.wikipedia.org/wiki/Point_and_figure_chart


The way I see it is a bit different than what most of the vanilla literature talk about it. It's a chart of pure price movement in two directions - either UP or DOWN. There is nothing else in it. Unlike other charts - line, bar, candle it does not change the directions immediately. Market to me is just like a School class room without a teacher. It's in utter chaos, you can't hear anybody nobody can hear you and it goes on but there is so much noise. The noise often comes out of class room walls but students almost never. But when the teacher comes in, almost everything is in order! The teacher is the fundamental and the class are us the market players.

This PnF method, therefore, tries to elevate the market from a School class room to a College class room. Where it incorporates a discipline and puts a tolerance limit beyond which only the participants will react. It forces us to be disciplined and not get swayed in absence of fundamental clarity. So how does it do all these philosophical talk?

Chart Construct

The chart is constructed with four components:
  1. Graph sheet
  2. Two symbols - X (for UP) & O (for DOWN)
  3. Daily data with Open, High, Low & Close (High & Low are must)
  4. A buffer figure - Block size (Chart Sensitivity) * Reversal (Noise Filter)
One logic:
  • If current symbol is X --> 
  1. Check New High > Last High + Block Size --> Plot one more X on top of last X else
  2. Check New Low < Last High - Buffer --> Plot one O at new block position
The same logic applies when the current symbol is O.
So, we see Open and Close prices are of no use except for some overlay on the chart itself.
Concept
Buffer figure: Block size * Reversal
Let's take an example here.





Quick Tips:
The moment a PnF chart is flashed, we need to see one thing first - Construct, i.e. Block Size = 1, Reversal = Can not be ascertained from this chart (assume 3)


Now coming back to the example. This chart shows that the down trend is on. Current price is within 11 to 13 (assuming 3 point reversal).
Say, next day the H-L is 14 - 10. So what do we do next? Though there was test of high but the rule of the chart will ignore this as a noise and go ahead and put one "O" at 10! Now practically, if somebody observes the day movement and if the movement has been from 'High to Low', the chart's point of view is valid as the upside movement can be considered as 'noise'. However if it happened from 'Low to High', then this is not valid. But if up trend continues, next day the chart will anyway change column from "O" to "X".

So block size and reversal are two very important concept in this. Trend increases the price by incremental block and reversal happens beyond certain level of price point and not at every fluctuation.

In the next part of the we will straightway enter the analysis part and shall try to spend maximum time in analyzing several real-life charts.

7 comments:

  1. So PnF can't be done on an hour chart, is that too short-term? Just wondering because I assumed it worked on all timeframes.

    (btw, Rajib, the yahoo link didn't work in the dl - or maybe I didn't know how to work it. Do let me know how it brings in data to the chart.)

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  2. For Nifty, I mean - couldn't figure out the symbol. nifty.ns?

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  3. Day & Weekly chart is enclosed in blog site for downloading. How can we get the HOurly Point & Figure chart.

    I am desperate pls help

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  4. hi,

    I am new to pnf charting.
    I had some newbie questions. Would be glad if someone could help me with them.

    Suppose you enter a long trade based on double top or trendline break signal. How do u find your exit signal/stop loss/target price?
    Should you wait for the opposite signal (double bottom in this case) ? Would you not lose a lot of profits, if you wait for the opposite signal ?
    Thanks

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  5. @ prashanth,

    request always put your Q in the recent post, as past posts may not be noticed by the blogger.

    Reg your question, always take a low risk buying, which is near the previous support (likely to fail). So you should ideally buy near a BlSL, if it fails, at best you lose 3 pts. Mostly it would succeed, thereafter you keep trailing.

    Keep your common sense on, don't blindly follow signal. Happy trading!

    Rgds, Rajib

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  6. The Nikkei 225 in Japan was down 0.93 percent, with stocks likely under pressure from a relatively stronger yen.
    capitalstars

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  7. Thanks!! this is really helpful. Massive effort

    ReplyDelete