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Point & Go Figure


The downside price objective: my favorite.

One of the advantages of using point & figure charts for context is that they can define clear support and resistance levels, clear buy and sell signals, and a framework for estimating both potential upside, and potential downside.

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 .
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No positions in stocks mentioned.

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