SIDEBAR: LOGARITHMIC POINT & FIGURE by Technical Analysis, Inc.
The point and figure chart, which is built on a filtering technique, is an old favorite. In a one-point chart,
moves of less than one point are filtered out; in a three-point chart, all moves of less than three points are
filtered out. The idea is good, but this type of chart has several drawbacks. First, the chart makes the error
of using points and not percentages. Points are a poor measure of importance in a stock chart. One point
can be very important in a $10 stock but be a very minor move in a $100 stock.
Another limitation of the P&F chart is the use of arithmetic scale, which has a built-in distortion. A 5%
move at the bottom of the chart may be completely hidden, while at the top of the chart it may look like a
major move. On an arithmetic chart, a trend rising at a uniform l0% per week seems almost flat at the
bottom but skyrockets at the top of the trendline. A straight trendline on an arithmetic scale actually has a
decreasing rate of incline as you travel up the line. Another limitation of the point and figure chart is it
ignores the aspect of time.
You can eliminate these limitations with three simple steps. First, set up your filter as a percentage, not in
points. Ignore any reversals of less than your specified percent. Second, use a logarithmic scale for prices,
Third, put time on the horizontal scale of prices (see sidebar Figure 1).