Point & Go Figure
The downside price objective: my favorite.
The easiest and most popular way to measure upside, or downside as the case may be, is through the orthodox vertical price objective. It is a simple mathematical calculation that can be applied to all new point & figure signals, basically creating a risk/reward ratio comparing the price objective to the nearest sell signal, or what is deemed the most significant sell signal.
Yesterday we looked at how upside vertical price objectives are calculated. To recap, this is the formula for an upside vertical price objective (remember the upside objective requires a new buy signal following a low):
Formula: Number of Xs * 3 * box size (e.g. 1, .5, etc.) = Vertical Price Objective
Today we'll look at how downside vertical price objectives are calculated; a similar formula, the difference being one uses the number of Os to the right of a chart high following a new sell signal.
Many point & figure chartists use an identical formula for the downside objective (Number of Os * 3 * Box Size) but the way I was taught by Tom Dorsey and Dorsey, Wright is to substitute a 2 for the multiplier instead of a 3. In my experience this give a more realistic downside objective.
Let's look at an example using RenaissanceRe Holdings Ltd. (RNR).
RenaissanceRe Holdings Ltd. (RNR)
(Chart courtesy Dorsey, Wright & Associates)
The first column of Os in which a sell signal occurred following a chart high is highlighted on the chart above in red. To obtain a downside vertical price objective, we will simply take the number of Os in this column (7) multiply by (2) and then multiply by the box size (in this case each box has a fixed value of 1).
Downside vertical price foromula: Number of Os (7) * 2 * Box Size (1) = 14
Then, we take 14 and subtract it from the top O, which in the case of CRL is at 55. 55-14 = 41. The downside objective is therefore 41.
Again, price objectives are not set in stone. They may change depending on how the chart develops. In the case of CRL, however, the downside objective has not changed. In fact, the chart has not given a buy signal since the initial sell signal and is now approaching the downside objective of 41.
Price objectives are simply ways to evaluate risk/reward before putting a position on .
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter