Point and Figure Charts: Calculating Price Targets
Another
objective feature of Point and Figure charts is in calculating price
targets. Targets may be established using two methods,
vertical and horizontal. The vertical method uses the first
column from any top or bottom to establish the target.
The length of the thrust determines the extent of the move, so the
greater the initial thrust, the greater the target.
The horizontal method requires a top or a bottom where there has been
some sideways movement and is based on the width of the top or bottom
pattern to determine the extent of the move. Both methods can
be used on the chart, but there are more opportunities to use the
vertical method.
Understanding Point and Figure Charts: Defining
Price
Targets
Figure 6 is a 15 x 3 Point and Figure chart of the S&P 500
showing some vertical and horizontal price targets. Notice
how accurate they have been in both the uptrend and the down trend,
remembering that targets are established well in advance of being
achieved.
Figure
6
S&P 500 Index 10 x 3 P&P chart showing price
targets
Price targets are a guide, it should never be assumed that they will be
achieved exactly. They give an indication of the strength of
the chart and provide a potential target area.
Because Point and Figure signals are so clear cut and unambiguous, it
is easy to see where a buy signal has occurred and what is required to
cancel the signal and consequently where a stop should be
placed. This means you can calculate the risk reward ratio
based on the price to target divided by the price to the
stop. This tells the trader the potential number of points of
reward for every point of risk taken on. Because
the targets
and stops are objective, these risk reward ratios can easily be
calculated by a computer.
Figure 7 shows the same S&P 500 chart but as at 27th December
2011. The 1440 target has been established with two possible
stops at 1200 and 1155 identified, because a break below these levels
would generate double bottom
sell signals. This allows two
risk reward ratios of 2.2 and 1.4 to be calculated depending which stop
level is used. These ratios help you to decide, firstly
whether the take the trade and secondly where to place your
stop. In this example the price rose and hit the 1440 target
in September 2012.
Figure
7 S&P 500 Index 10 x 3 P&F chart as at 27th
December showing risk
reward ratios
It is important to understand that objectivity implies there is no
ambiguity, but it does not mean infallibility. It means there
is no argument as to whether a signal, trend or target exists or where
it is positioned. So objectivity does not guarantee accuracy,
but it does remove any doubt about the analysis.
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