Point & Figure Charting - secret weapon?

[motorway]

Snake
Here is an example
map in time.... The high being . on Mon Tues or next Friday

changes all aspects of the chart
because no longer is each point 100% constrained by the preceding

you have introduced a foreign body (clock) time.

Now map in intrinsic time ( how real life is lived by the way )
By discretization by price
and the high is defined 100% by preceding ( and succeeding) points

what the clock says will never alter a trend line

only the "events"

This is why diagonal forecasting lines ( their original name it seems)

could be drawn at 45 degrees ( only later where they called support and resistance lines )

The chart is a "squared" chart of "events"

These events betray their character by being mapped
in their intrinsic time..

I came across a large brown snake last week ( true )
I was on a narrow path about 1/2 a meter

I watched him in intrinsic time
If he moved I wanted to move first
it was the "events" that were important

I did not use a 1 min scale and because there was no movement
switch to a daily..

If you are defining time by "events"
you have all time frames by having none

The scale is in the moment
time is intrinsic
it moves or not
there is amounts of work
or not

Time is movement and duration

and has real effect

cause and effect
( The name Wyckoff practitioners give to the "Figure" chart )

Why is forecasting important
Because we all do it and have to do it
Will take an action for the utility
We choose to participate even passively

Because of something..
follow trends why ?
Buy and Hold why ?

Why enter even randomly
because we forecast something good has some probability.
and we choose to participate
rather than not.

motorway

 

[It's Snake Pliskin]

Snake
Here is an example
map in time.... The high being . on Mon Tues or next Friday

changes all aspects of the chart
because no longer is each point 100% constrained by the preceding

you have introduced a foreign body (clock) time.

Now map in intrinsic time ( how real life is lived by the way )
By discretization by price
and the high is defined 100% by preceding ( and succeeding) points

what the clock says will never alter a trend line

only the "events"

This is why diagonal forecasting lines ( their original name it seems)

could be drawn at 45 degrees ( only later where they called support and resistance lines )

The chart is a "squared" chart of "events"

These events betray their character by being mapped
in their intrinsic time..

I came across a large brown snake last week ( true )
I was on a narrow path about 1/2 a meter

I watched him in intrinsic time
If he moved I wanted to move first
it was the "events" that were important

I did not use a 1 min scale and because there was no movement
switch to a daily..

If you are defining time by "events"
you have all time frames by having none

The scale is in the moment
time is intrinsic
it moves or not
there is amounts of work
or not

Time is movement and duration

and has real effect

cause and effect
( The name Wyckoff practitioners give to the "Figure" chart )

Why is forecasting important
Because we all do it and have to do it
Will take an action for the utility
We choose to participate even passively

Because of something..
follow trends why ?
Buy and Hold why ?

Why enter even randomly
because we forecast something good has some probability.
and we choose to participate
rather than not.

motorway

Thanks for the effort to explain Motorway. I'll have to read it a few times.

Brown snake. LOL

 

[motorway]

The bottom of the page

is a small video

http://www.clickevents.co.uk/interviews1.htm

Kermit Zeig - Anyone who has studied Point & Figure charting will be aware of Kermit, he has published many books and article on the subject.
Kermit lives just outside Washington where I met him and he told me about the simplicity of P & F for swing trading. Kermit describes himself as a veteran trader and has invested and traded all his adult life. In addition to Point & Figure Kermit is an options enthusiast and he talks freely here and shares his trading style.

The story of Robert Earl Davis contains a lesson
He doubted what his chart's were saying.
And it led to a sad outcome..

His charts were saying-
The Hunt Brothers

But the "fundamentals" were not...


Davis was a very much respected researcher
on P&F he did a lot of back testing

His best known book was

Profit and Probability: Technical Analysis of the Price Fluctuations of Common Stocks by the Point and Figure Method
By Robert Earl Davis




He is from the ..P&F as a trading system School..

And a medium term to long term trader
3 box reversal EOD high/low
chartcraft ( A W Cohen )

Style

They do tend to go together because
of how objective P&F charting is, chartcraft system
is well worth study too .


motorway

 

[motorway]

Point and Figure charting has a rich history present and future..

Where are the buy signals
Where you decide they are
depending on what "system"

For Dorsey this is a break of resistance

For Wyckoff it could well be at the opposite side of the pattern ( where that tide turns )

Some people regard a stock (or the market) in this (springboard)
position only when it breaks through an old line of resistance or
support into a higher or lower field. I claim that the beginning of
the springboard move is at the bottom of a range of accumulation, or
in the upper levels of a range of distribution.

For DeVilliers ... It was about buy and sell signals too
But Fulcrums and catapults

But Wyckoff---

From the general formations (not so-called patterns such as “saucers,” “baskets,” “fulcrums,” etc., which are popular with some purely theoretical technicians) on the figure charts we are able to detect accumulation or distribution, and we see, clearly marked, the lines of support and supply. We can also identify the marking up and marking down periods to excellent advantage by means of these charts.

To say a P&F chart is double tops and bullish support lines
IS to say bar charts are only about heads and shoulders and moving averages..


Underneath all P&F methods are the principles and essence that make it what it is .....

A good example is the current action on the XAO
here is the same 25 x 3 chart

Each change of column is an event ( unlike a bar chart )

It is where demand overcame supply
or supply overcame demand..

The amount of possible information in each "event"
is visible in the length of the column that each event generates..

Information possible because
each column is a test and response
the next column qualifies by confirming or negating
the "surprise" by it's length making visible the "equivocation"..

The horizontal "coiling" is what builds the cause
( reduces "equivocation " )

You can read a story of bullish and bearish statements
with every column change
Every time there was an "event" ( it is only the "events" that can bite --my brown snake)

Some movements have no cause and do not follow through
(eg rally from oversold position) Some there is extensive work ( like the current action...

All these events following one another reveal a TREND

With more condensation... This trend is revealed with more clarity
( compare this behavior with a chart built from fair coin toss.. A random string is it's own shortest description )

The mid line is important
it is still able to make a higher low,,

The two "diagonal" lines are important too
and would have given buyers of buy signals
reason to be doubtful about a "buy" signal defined as a break of resistance.

Key point P&F is a series of events

The top of each column was resistance
The bottom of each column was support

P&F is a dynamic chart of support and resistance

( we need lots of descriptions to get anywhere near the possibilities)

Both vertical counts are still to be negated
They both were generated and activated
They are both still active considerations..

They are qualified by the diagonals
and the congestion width



A P&F does in a dynamic and adaptive way
all sorts of things that indicators on bar charts
attempt to do

consider ROC and BB ( look at the fluctuations expanding and contracting)

The P&F is already both of those things
only without a time frame or look back period

A person watching the tide coming in and who wishes to know the exact spot which marks the high tide, sets a stick in the sand at the points reached by the incoming waves until the stick reaches a position where the waves do not come up to it, and finally recede enough to show that the tide has turned.
Charles Dow 1901


Problem with Volatility Measures ( He is talking about daily and weekly time frames )

Volatility for the two series are identical
Could be better described by directional change

Measuring directional change

Set a size, r% (say 0.1%)
Record the "last high" and "last low"
A new last high is recorded when:
It is above the last high
Or it is r% above the last low
A last low is recorded similarly
A change of direction (event) is defined as a "last high" followed by a "last low" or vice versa
Record the number of events

Richard Olsen 2008

Both quotes are the same

What does a Geiger counter measure
what doe the Richter scale
what does a P&F chart

They all measure "events" that matter they are not clocks

Something moves and we want to move first...

motorway

 

[motorway]

25 x 5 chart

notice how the diagonals are now defining a different

"event" horizon which is related to a time horizon
But never a time frame
the chart will still move at what ever speed
"They" do...

instead of using different "angles"
P&F chartists used very early on
different reversals ...

These lines are the "Objective" lines
we can also draw "Subjective" lines



motorway

 

[inrodwetrust]

Hi All

And thanks to Motorway for your posts....it's finally dragged me out of my lurking status! :couch

Just briefly, I've been trying to learn/understand PnF for the last few months. I've read both Dorsey & duPlessis's recent books, with duPlessis's particularity useful for a more detailed analysis. So I kinda get your drift in your posts, but not all!! So I find this thread (& Wyckoff) interesting.

I've yet to develop a reliable system, I'm only using EOD data & only long, so I still consider myself an apprentice.

I initially used Dorsey's trading method ie. breakout, which seemed to be ok when the market rallied, but I'm finding in the current market conditions I'm getting chopped around a bit. So I'm looking at trying to into buy early in reversals.

I find PnF particularity useful for identifying/setting stops & trends.

But clearly, it is not without it's idiosyncrasies eg. wide ranging intraday reversals may give no opportunity to get the early reversal trade (ie Long Tail Down). Intraday charts may avoid this, I think. And of course whipsaws caused by false breakouts are an issue like any technical analysis tool etc.

Sometime I will probably try intraday charts and I've looked at Updata's, which is clearly currently the best PnF charting s/w available. AFAIK, ASX intraday feed is not yet avail for it, so Motorway do you use Updata with ASX EOD or intraday? or don't you trade the ASX?

As yet, I believe no publically avail s/w can reliably backtest PnF charts (so how can any of us mugs really know how good it is?). So I thought I might mention, as no one else has(I don't think so anyway), the recent release of WealthLab Developer 5.1 (I'm aware there is already a bit of a following with WLD4 on the Central Coast traders group).

It has been completely rewritten from a Pascal scripting like language(ie slow for backtesting) to C#, a complier driven platform (ie. several times faster). But there is a lot more to it than that and those interested would be better reading the product details on their site.

http://www.wealth-lab.com/Home/Default.aspx

But briefly it means opening it up to significantly more funtionality....eventually...as it's really a new product & better renamed as WLD1.0, as as yet not all functionality has been ported across. Go to the following to see differences between 4 & 5

http://www2.wealth-lab.com/WL5Wiki/(X(1)S(3vcjdcm2coac0y45xexw1e45))/Default.aspx?Page=kbProductComparison&AspxAutoDetectCookieSupport=1

and the Wiki site for more on WLD5

http://www2.wealth-lab.com/WL5Wiki/(X(1)S(d1nxy055jvm3bb554yqrxf45))/MainPage.ashx

So why WLD, because there is some code to draw PnF charts & signals that can be backtested....the catch....there is always one!...the PnF charts are primitive compared to Updata's...and only a sample Basic PnF code has been written to demo a doubletop buy/sell system. The good is that if one is a competent C# programmer(actually any MS Visual Developer), the sky's the limit to what one could code...although a few more functions like optimising will be added in future versions. The still bad is if you can't code....

I'd be curious to know what Kaveman, who wrote some PnF code for AB, thinks of WLD5.1, will it be a better platform in the long run? Who probably is one of the very few who can understand & code a PnF system. And can say if relable backtesting of PnF charts is possible.

Anyway a bit of fodder for the forum, that might be interesting to some.

And no, I'm not in any way affiliated with the developers of WLD etc.

Regards

 

[motorway]

hello inrodwetrust

welcome to the forum

I have been waiting on the intra day feed for the ASX
last date I have heard is October
There is an Esignal Version also

So I am using EOD data ( not updata's )

We don't really want the time of the clock deforming our charts
or constraining our charts..

So you have to use a sensible box /reversal size

eg one that would result in a chart no different to one drawn from course of sales

with the XAO 25 pt chart on a 1 box reversal there would be
time deformation becoming an issue

25pt x 3 with hi/lo very little

with course of sale data
you can go down to as fine a resolution as you like
as long as you filter the noise of the buy and sell spread ..

traditionally and ( zeig recommends the same ) no smaller than 2 tic

though tape reading charts were drawn with every eighth ( USA ) & included volume in the boxes... ( example of volume in John Durands book from 1927- Business of Trading in Stocks , check the review on Amazon JD was not Richard Wyckoff , but was a columnist at the Magazine of Wall street)
a rough example in tape reading 1910 by Wyckoff )

long tails only appear really with EOD charts Hi/lo
and "chartcraft" scaling ( USA mkts seem to have significant higher volatility historically and is the land of the reverse split -- they like to keep share prices in a certain zone )

long tails are not a problem when you are informing your 3 rev charts with 1 reversal

Zeig ( in the video above) uses Matlab for charting and backtesting

Have not had time to post much ( see a question in the Wyckoff Thread )
But saw your post and so hello

Duplessis's book is certainly a good introduction

The old books are well worthwhile
as are new descriptions like Olsen's

( He has patented his version of what I would call a point and figure chart)


motorway

 

[motorway]

Method and system for measuring market conditions Document Type and Number:United States Patent 20030149648 Kind Code:A1

Abstract:The present invention introduces two “event” scales for financial markets, called “scale of market shocks” (SMS), which measure the importance of the market movements. These indices are based on the price volatility and are computed by integrating mapped asset volatilities over time horizons that range from 1 hour to 42 days.

The first SMS is an absolute scale, or universal scale, allowing values of different assets to be compared directly. The second SMS is an adaptive scale, calibrated to the typical behavior of each asset allowing the relative importance of market movements to be assessed. In principle, the SMS can be constructed for any market: the indices are computed from the price time series. In the foreign exchange9e (FX) market, each index is associated with a currency pair and we derive from it an index per currency and an index for the whole market.

In order to define the most appropriate SMS, the probability distribution for the volatilities is studied first. Then, the probability distribution of the two scales is computed. For USD/DEM and USD/JPY, the relations between peaks for the SMS and major “world events” is put forward. In addition, we also measure the correlation between the Scale of Market Shocks index and the size of the next price movements, which shows a high correlation for short time intervals.

This is what we do with P&F
We also use universal scales
and adaptive scales

depending on whether we are stalking or scanning . ( updata has good scanning )

Kermit Zeig
has done backtesting following on from Davis

What makes a large difference is taking signals with trend

( you can define the trend with objective lines , subjective or with counts )

P&F naturally filters out chop and whip saw..

I call it the chart that does not move
( The Phantom is the Ghost that walks... Ghosts are not supposed to walk)
If it does move it never has to be sideways.....
This is key to understanding

Below is some of Olsen's description

It is very much like the old books

lookback and overshoot

The one P&F not in any of the books is Wyckoff's
it is the same as his Price and Volume

Thrusts and Reactions.

Shortening of thrusts
= the other side

Tests to watch for response

down and across has to = some accumulation
up and across has to = some distribution

SOT...........Watch out

Springboard..

An important part of the Wyckoff approach is the use of figure charts. Figure charts are a tool that Wyckoff traders can use to compress the action of the market or an individual issue to provide a perspective that may not be effectively provided by a bar chart. They provide an insight as to the future level of the market or future price of an individual issue. They can be effectively used as a supplement to the study of price and volume action and they can be grossly misused by traders who are caught up in wishing and hoping for things that have little chance of ever being realized.

http://www.wyckoffstockmarketinstit...les/Selling/figure-charts-counts-counting.htm

All the whiz bang things indicators try to do on bar charts
the P&F chart does do .

But adaptively and with no lookback

( what is wrong with most for example rel strength studies )



motorway

 

[motorway]

Bear with it
, There is a lot in it
I have tried to explain something important.
one thing of many .


A P&F chart of an information flow becomes more ( obvious) when it is condensed because it has a low Kolmogorov complexity, given by the length of the smallest repeating "template"


P&F started out as tape reading.....thrust reaction test response became reduced to fulcrums & catapults then reduction to simple, breakout patterns..
From congestion analysis to breakout analysis

( It is worthwhile considering the dynamics underlying the mechanical patterns...)

From forecasting & anticipation from what has stopped happening
to reacting to what has happened

A P&F chart of an information flow becomes more ( obvious) when it is condensed have low Kolmogorov complexity, given by the length of the smallest repeating "template"

A question what is the smallest repeating "template" to make a P&F chart

http://www.fortunecity.com/emachines/e11/86/onaroll.html

remember it is a chart of "events" an event is a self contained whole
( It is price volume & time woven together- Alexander Wheelan Study Helps in P&F )

But what is the minimum series of "events" ( not time series,, an event series... we do not trade time, but events ...moves---This can be very significant realization... A move completes, Time simple ticks Always TRADE MOVES ) )

The template ( not necessarily definitive but for example )

1st column = a disturbance ( action)
2rd column = a completed cycle of test response ( information equivocation / action reaction ) ( but you have to lock the column ,2 is not 2 until 3 is activated )
3rd column = confirmation negation
4th column = follow through , completion of the pattern / template , ( 5 point patterns Ms & Ws ( Victor de villiers , Bollinger defines 16 Ms &Ws )--- define a trend

Patterns damp and expand

key to identify an action ( thrust , impulse ) from a reaction

http://www.patternpower.com/support/

Templates are fractal ( de villiers- fulcrums in fulcrums )
because ( John Durand ) when the chart is condensed it is the completed cycles that are condensed not just disturbances
compare to time based charts , We can not say this

You go from daily to weekly etc...You are condensing time
not patterns of demand and supply
This point is SO IMPORTANT

When the chart is condensed it is the completed cycles that are condensed not just disturbances
..

RDW.........use a daily bar & a figure chart, If Figure chart is unavailable.. a weekly and monthly will ( have to)do !

Price movement does not unfold in equal units of time---something Wyckoff obviously understood---it unfolds in waves.

However you condense a P&F chart.........The reality ( voice ) of the tape is not deformed.

One of the first to realize the market is multi fractal were figure chartist's
because as they condensed their charts
the structure remained the same
The trend constants remained the same

spec cycles were condensed into spec investment cycles
spec investment cycles into investment cycles etc ( John Durand )

Because what is condensed is not time
but completed cycles

To do the same with a time chart
it would have to have a variable and adaptive time scale
in other words it would have to be transformed into a P&F chart..

motorway

 

[motorway]

A P&F chart of an information flow becomes more ( obvious) when it is condensed because it has a low Kolmogorov complexity, given by the length of the smallest repeating "template"

Do you think this chart is random ?

Each event is constrained by the preceding events , Richard Olsen

=They have a memory

So

Lines are meaningful &
Counts are meaningful

Neither would be true on a coin toss chart

We ( should) measure this "coastline" of the price (event) series
with a ruler and not a clock. If we want to see this .

However it is the events creating the lines and counts
not the other way around

= they are tools..

they can be grossly misused by traders who are caught up in wishing and hoping for things that have little chance of ever being realized.

Kermit Zeig
has done back testing following on from Davis

What makes a large difference is taking signals with trend

( you can define the trend with objective lines , subjective or with counts )

P&F naturally filters out chop and whip saw..

motorway

 

[motorway]

An early system trader

motorway

In the Ticker Magazine of August 1908, in an article entitled The Trader's Convention, by Mr. E.C. Cummings of North Wales, PA. Mr. Cummings noted that stocks often move 10 points in one direction, and gives a workout of American Sugar to prove that with proper stops, even during the 50% decline for the market of 1907, a point and figure system would have made money on the long side. He lists the following rules for his system:

Consider only movements and reactions of one point or more.
After a stock has moved in the desired direction by a point or more, wait for the reaction to that particular movement. After the reaction has terminated, and a second movement has begun one point from the ending of the reaction, buy the stock.
Protect each trade with a two point stop order.

After the second movement of a point or more has reacted, and the third movement has begun, trade again, providing the second reaction did not reach as low as the first reaction.
After two points of profits, move the stop to the purchase price.
Rules for entering shorts are symmetrical to those above.

 

[motorway]

Again is this chart Random ?


motorway

ps some consider this market the one to watch for early indications

 

[motorway]

( you can define the trend with objective lines , subjective or with counts )

just clarify ----You can use this to see in what way a trend is conforming
to eg a trend line ( Wheelan )

But true trend is the relationship of highs and lows

as distinct from action conforming to trend lines and counts

1 box reversal of the XAO

Strong M ?
next column
will instigate the transformation into a W

the W will be a response to the M as test
Ws & Ms continually transform into each other,

strong into weak
weak into strong
trend reversal
dampening expanding

motorway

 

[motorway]

Fractal sets show self similarity with respect to space. Fractal time series
have (only? ) statistical self similarity with respect to time

Take a P&F chart of any box size ( or type ) of any scale..

We will find

Single Columns going up or down

The top of every up column will be the high and close
The bottom of every up column will be the low and the open

The bottom of every down column will be the low and close
The top of every down column will be the high and open

Adjacent to every down column will be an up column

Up and Down columns will always alternate

1 is a disturbance
2 is a response

A third column will define a direction with a swing high or low
Always

The 4th will form a W or M Always

As new columns are generated
Ws transform into Ms
Transforming into Ws

they only exist when frozen on the static chart
They are in fact tendencies in movement

Causes and effects ( both at once ) efforts and results

The underlying idea of the whole is the idea of change

"Change is not meaningless -- if it were, there could be no knowledge of it " Richard Wilhelm

motorway

It is difficult to over-emphasize the importance of studying the technical position, particularly when making a speculative commitment.
RDW

Structure is Process....

"Positions" are in fact tendencies in movement ..

We start off with the reality of the tape

How can we condense ( distill ) that reality without distorting it ?

Financial data are recorded down to the tick transaction (virtually continuous time)
We mostly compare the classical ”time based” approximation to the ”move based”
approximation.
• Many possible approaches (PCA, wavelet analysis, time based, move based)
• Move based: define set of levels, and each time a level different from the last one is
hit, record it

• It is based on a very compact encoding
• It makes use of non parametric estimation
• It is opportunistic, not dogmatic: it does not favor trend following nor range trading
per se; it just exploits the data optimally.

Bruno Dupire

No matter how much we condense the P&F chart
The dynamic structure of the tape at tick level is retained
Even if we condensed a P&F chart to the point where a bull and Bear cycle
was condensed to two columns..

There would still be columns up and down
still alternating
etc etc

Digitizing the Price History
• Information compression: condenses the recent past into a sequence of binary digits.
• Keeps track of sequences of levels that have been reached.
• Extracts the relevance ( and structure) of moves .

One of the first to realize the market is multi fractal were figure chartist's
because as they condensed their charts
the structure remained the same
The trend constants remained the same

Quote:
spec cycles were condensed into spec investment cycles
spec investment cycles into investment cycles etc ( John Durand )

Because what is condensed is not time
but completed cycles

When the chart is condensed
what was a 6 column pattern
might become a 3 column pattern ( 3 columns of a larger 6 column pattern )

If P&F is to be a "Secret weapon" ( the question that is the title of the thread) P&F needs to be understood for what it is .

Two charts with trend outline .The XAO one with a 1% box size
the other with a 2% box size...

the arrows mark the same starting point...

When we condense away from the tape ( continuous ) time
With time based charts the structure and relevance of moves
is distorted, WHY ?

Price movement does not unfold in equal units of time it unfolds in waves.

motorway

 

[motorway]

What do we use P&F for
How do we scale a chart
What do the two axis represent
What do trend lines reveal
( what is trending and what through )

What are counts used for
why is it significant if a count is
1, generated
2, activated
3, fulfilled or negated
what is the logic behind counting
what is being counted

How is time important

where is support and resistance
how are they related to diagonal movement

What about volume ..


some charts follow

XAO 1% x 3

action conforming to the purple diagonal
( sometimes called a bearish resistance line )
The upside count is a weak count
generated by a 50% retracement
it has not been activated...
and can very easily be negated

The downside counts are stronger .

Generated and activated

They are active considerations
( trends last as long as counts are generated, activated and fulfilled
compare this behavior to a coin toss chart )

The upside count is useful to see how fast it is negated
or if it is activated ...

mere generation of counts = information

stocks whose action conforms to counts
= opportunity , start conforming stop conforming = identification of the non random...

something worthwhile eg to apply analysis to
There are causes that are producing effects





motorway

 

[motorway]

100pt x 1 reversal chart

this is very important chart atm

P&F is P&F when the noise of the buy sell spread is removed
( when markets gap 100 pts from close to open = such noise
hope the renko trend trader is reading )

(P&F as a tape reading chart is another thing -->stop and reverse chart)

1 box reversal charts continually generate areas of congestion
horizontal counts quantify this congestion

On what scale is order revealing itself

P&F is a superior volatilty map
volatiltiy is Risk creates Reward..

This is a chart to watch for change of behavior atm
speed ( time ) of reversals

count is active
last move up was weak



motorway

 

[motorway]

Log equivalent of the 100pt x 1

a 2% x 1

because it is price Vs reversal and
not price vs time

log linear or other
is not significant in the same sense

as long as the noise in the buy sell spread is removed
P&F is a chart of meaningful action Vs meaningful reaction

of complete cycles

motorway

 

[motorway]

A 2% bullish percent chart

~ 25% of stocks above the last point of resistance

above the last point where supply overcome demand

( some would say 25% stocks are on a buy signal,
( BUT is it better to be clear about what are the bare facts
( a BUY signal is not a fact it is an interpretation )

A P&F chart would only have us invest
where Risk is creating Reward

P&F defines what to apply other analysis too
( avoid coin toss opportunities )
or can be the start and finish of analysis as a stand alone method

breadth and relative strength techniques
( when is a breakout a breakout ? when it is a relative strength breakout )

look back at the 1% x 3 chart

how significant was the breaking of the diagonal lines
esp the first one since 2003 ?

The point we fail to remember is that public opinion in a speculative market is measured in dollars, not population. One man controlling one million dollars has double the weight of five hundred men with one thousand dollars each.

This is why the great body of opinion appears to be bullish at the top and bearish at the bottom. The multitude of small traders must be, as a plain necessity, long when prices are at the top, and short or out of the market at the bottom. The very fact that they are long at the top shows that they have been supplied with stocks from some source.

$1,000,000 deposits into super
sub prime mortgages
remember the reverse mortgage marketing to old age pensioners
etc etc etc

Yet P&F charts esp of USA mkts ( 1 box charts )
were going sideways ( very different to 1987 )

P&F chart is the chart that does not move
and if it does it never has to be sideways

 

[motorway]

While I think my method of measuring volatility works most of the time, it doesn't’t seem to be working now. We’re having wild daily swings that are cancelling each other making the market seem quiet. I suspect our market type is really volatile bear, but finding that out for sure will have to wait until we update our models to include the average true range.
Van K. Tharp

Problem with volatility measures ?

Volatility = directional change = risk

What causes directional change ?

differences of opinion

What is the most important part of analysis?

the areas of congestion

why?

Because this is where the chaos ( of differences of opinion) reigns
and where order is generated and destroyed
Reversed or recycled

To understand what support and resistance is
Requires mastery of P&F in two aspects

Structure and flow

as the coastline of prices

as a turbulent flow of prices

A P&F chart really does have a rate of change,
a momentum, a velocity etc
It really does move in alternating waves
it really does have volatility cycles

So support and resistance have two aspects

Structural
and dynamic...

congestion zones are dynamic bifurcations ( forks in the road )
which must be qualified by structure

eg counts, forecasting lines , congestion analysis..

to determine reversal from continuation...

Fractal Dimension

A line = 1
A plane = 2

When does a P&F look like a line
When does a P&F look like a plane

what do we look for when we look at structure from a different level ?

eg
If the "event volatility" is the same on a 1% chart as a 2% chart.

What is then revealed when that diverges?

eg When the 1% starts to have a faster rate of directional change ?..

The volatility on the large scale
is the container of the volatility on the smaller scale

Scale not time frame

There is only ONE time frame

That is why volatility cascades in the flow of prices
are very different to the cascades of turbulence in eddies in a stream

All scales .01% 1% 2% 4% 8% operate on the same time frame

They have different event horizons

But all meet in the NOW of the present moment

We have also revisited the analogy between finance and hydrodynamic turbulence in the light of these new
results. The structure of the interaction is different between the two phenomenon, due to their different time space
dimensionalities.

In finance, the components interacts only when they trade, resulting in all volatility
components influencing the short term volatility, whereas short term volatility is not influencing long term
volatilities. This is different from turbulence where eddies interact in space with eddies at the next scales.

It reveals a volatility cascade from long to short time horizons, with a structure
different from the one observed in turbulence.

An eddy of a given size can split into two eddies of half the size, giving
rise to the energy cascade, as first proposed by L.F. Richardson in 1922. Clearly, this is a cascade from one
scale to the next smaller scale. In finance, there is only 1 time dimension.

Therefore, the market participants
can only interact in time, and when a trader with any time horizon decides to buy or sell, he will create
volatility at the shortest time scales. In other words, the participants interact only when they trade, and it
is an “instantaneous” interaction.

I mentioned scaling
scaling is related to the existence of background volatility ( we want to detect change of meaningful behaviour ) and run theory- probaility of runs . So different to eg a Richter Scale...

Two charts 1% x 3 and a 2% x 3 both atm have same "event volatility" = very useful information

Because a P&F is really fractal a eg 4 column moving average is always
averaging the same 4 column fractal ( in this case Those Ms and Ws )

ALWAYS
( moving averages in a sense only make sense on such charts.)

= really useful information


motorway

 

[motorway]

what do we look for when we look at structure from a different level ?

eg
If the "event volatility" is the same on a 1% chart as a 2% chart.

What is then revealed when that diverges?

The only real risk traders face is directional change .
But it is also only directional change that creates opportunity..

Directional change = Event volatility

lookback = the directional change filter ( box size + reversal)
overshoot = the size of directional movement in excess of the lookback

Overshoot has two drivers

Informational
+ Behavioural

P&F quantifies these drivers and also identifies their relevent importance ( the subsequent response + across different scales of look back -fractal Depth + Dimension )

"coarse (large event )volatility," measured at the larger Scales, predicts "fine (small event )volatility," measured at the smaller Scale, significantly better than the other way round.


The volatility on the large scale
is the container of the volatility on the smaller scale

.....that the market, when it is healthy, actually has an infinite number of investment horizons. Which means that all investors look at information differently, depending on what their investment horizon is.

Give some examples of people with different horizons.

Peters: At one end you have institutional investors like PanAgora, where we take a very long-range outlook on the markets, and the information we react to tends not to be very technical or short term so much as fundamental or longer term. The day traders, of course, are at the other end. Almost everything they do is tied to technical information. The rest of the market will typically use a little of each. Most financial planning clients would be somewhere between those extremes.

When that happens, the market is diversifying its information set. The information that is relevant to the different groups is different. So, if there is a panic at the 15-minute investment horizon, then longer-term investors like us would actually step in and stabilize the market. We would consider that a buying opportunity, because things are deviating from long-range value.

Then how do you explain these sudden routs in the market, when everybody seems to be selling?

Peters: At certain times””for instance, when the Fed is raising rates””long-term investors will decide that their long-term information is no longer useful. It becomes unreliable. When that happens, then longer-term investors will also start trading on shorter-term information. In essence, their investment horizon shrinks to a shorter interval, and the investment horizon of the total market, rather than being diversified over a long continuum, becomes more uniform at the short end.

That would explain the 1987 crash.

Peters: Exactly. What ends up happening in crashes””or exaggerated events””is that everybody is trading on the same information-set.

I find it interesting that this is essentially what the efficient-markets crowd says is happening all the time. But in the times when it actually does seem to be happening, the results are extremely unstable.

When everyone is trading on the same information-set, then they are all following one another. The result is this extreme volatility and swings in the market. The market, in essence, loses its stability, because it is losing the fractal structure.

The thing about fractals is that they have no characteristic scale. The deeper you go, the closer you look, the more you see exactly the same pattern that you saw in the larger frame of reference. In the marketplace, this characteristic scale is the investment horizon of the participants. As long as there is no characteristic scale, as long as everybody has a different investment horizon, the market is fractal and is resilient to unexpected information.

However, when everyone has the same investment horizon, the market loses that resiliency. That's when you get panics and stampedes.

You made the argument in Patterns that if we ever actually entered into an efficient market, then the market would die, that it would lose the ability to self-correct, to evolve, to adjust for change. Only a chaotic market, you said, has the vitality, if you will, to flourish.

Peters: Yes. That's because it offers opportunity. If there is no opportunity, then nobody would bother to invest.

In fact, I think you compared efficient markets to the Soviet state, which removed opportunity in the name of stability.

Edgar Peters