V.9:10 (401-402): Logarithmic Point & Figure by Arthur A. Merrill, C.M.T.

V.9:10 (401-402): Logarithmic Point & Figure by Arthur A. Merrill, C.M.T.
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Logarithmic Point & Figure by Arthur A. Merrill, C.M.T.

In the June 1991 STOCKS & COMMODITIES, I described how a turning point could be measured by filtering out minor market moves. The same filtering technique can be used to correct the failings of the traditional point and figure (P&F) chart and upgrade it to logarithmic status.

The P&F chart, built on a filtering technique, is an old favorite. In a one point chart, moves of less than one point are ignored or filtered out; in a three-point chart, all moves of less than three points are filtered out.

The idea here is great, but 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 an arithmetic scale. This scale 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. In an arithmetic chart, a trend rising at a uniform 10% per week seems almost flat at the bottom but skyrockets up at the top of the trendline. A straight trendline on an arithmetic scale actually has a reducing rate of rise in percent as you travel up the line. You've noticed how the scale points get closer together as you rise on a log scale; this recognizes the shrinking importance of a point and corrects the distortion of the arithmetic scale.

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