Brandon Wendell, CMT
Brandon Wendell
When technicians chart using point & figure charts, they are doing so to identify and stay in longer trends. We do not want to be shaken out too early on a trade that could have yielded much more profit. Therefore we would want to make our signals less sensitive so we have fewer of them or we need to use some sort of filter so that we do not take every trade we happen to see.
We must have a trading plan or system designed around the use of our technical tools. In my previous articles on Point & Figure charting, I told you the need for identifying your entry, stop, and even projected target for the trade before entering it. Supply and demand levels work the same in point and figure as they do in other styles of charts. Look for an area where trend reversed strongly. Your typical rally-base-drop or drop-base-rally would do just fine. You should look to buy or sell when you receive entry signals in those areas only.
One of the simplest filters is to make sure the trades we take meet the standard 3:1 reward to risk ratio we always follow in our classes. Since we know our entry, our stop, and can use supply and demand or even the horizontal or vertical projections for our targets, there is no reason why you cannot take only the trades that offer the greatest potential for success and the lowest risk in relation to it.
The overall trend of price is something we look at to determine whether we should be a buyer or a seller of a stock. Why should it be any different with P&F charts? The difference in drawing the trend lines is that they are traditionally only drawn at 45 degree angles from a low or from a top. You would not connect multiple lows for an uptrend or multiple tops for a downtrend as you would with candles.
We can also limit our risk in trading by only trading with the trend. If you are above an uptrend from a low, you would only look to enter trades when you receive a buy signal. Use the selling signals to exit those longs only. You would not take a sell signal as an invitation to enter a short as it is counter trend and has a lower probability of working. The short positions should only be entered when you have a sell signal when you are trading below a trend line drawn from a high. You would use a buy signal to exit those shorts but not to enter longs.
Breaking a previous column of X’s is a simple signal. So is breaking a previous column of O’s. I showed you some patterns that can be used as more advanced entry signals. There are many others. Some technicians will only enter trades on a complex signal and then exit upon receiving a simple signal. This will also serve to filter out a lot of unnecessary trades.
There are a lot of choices to screen out trades that are marginal. We want to trade smarter, not more. No matter what system you create, be sure that it manages your risk properly and offers you the opportunity to identify and take high probability, low risk trades. There are plenty of them in the markets waiting for you.
Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.
Editors’ Picks
EUR/USD drops to daily lows near 1.1630
EUR/USD now loses some traction and slips back to the area of daily lows around 1.1630 on the back of a mild bounce in the US Dollar. Fresh US data, including the September PCE inflation numbers and the latest read on December consumer sentiment, didn’t really move the needle, so the pair is still on course to finish the week with a respectable gain.
GBP/USD trims gains, recedes toward 1.3320
GBP/USD is struggling to keep its daily advance, coming under fresh pressure and retreating to the 1.3320 zone following a mild bullish attempt in the Greenback. Even though US consumer sentiment surprised to the upside, the US Dollar isn’t getting much love, as traders are far more interested in what the Fed will say next week.
Japanese Yen refreshes three-week high vs USD; seems poised to appreciate further
The Japanese Yen retains bullish bias as BoJ rate hike bets offset dismal Household Spending data. Dovish Fed expectations fail to assist the USD in attracting buyers and keep a lid on the USD/JPY pair. Traders keenly await the US PCE Price Index for Fed rate-cut cues and a fresh directional impetus.
Editors’ Picks
EUR/USD drops to daily lows near 1.1630
EUR/USD now loses some traction and slips back to the area of daily lows around 1.1630 on the back of a mild bounce in the US Dollar. Fresh US data, including the September PCE inflation numbers and the latest read on December consumer sentiment, didn’t really move the needle, so the pair is still on course to finish the week with a respectable gain.
GBP/USD trims gains, recedes toward 1.3320
GBP/USD is struggling to keep its daily advance, coming under fresh pressure and retreating to the 1.3320 zone following a mild bullish attempt in the Greenback. Even though US consumer sentiment surprised to the upside, the US Dollar isn’t getting much love, as traders are far more interested in what the Fed will say next week.
Gold makes a U-turn, back to $4,200
Gold is now losing the grip and receding to the key $4,200 region per troy ounce following some signs of life in the Greenback and a marked bounce in US Treasury yields across the board. The positive outlook for the precious metal, however, remains underpinned by steady bets for extra easing by the Fed.
Crypto Today: Bitcoin, Ethereum, XRP pare gains despite increasing hopes of upcoming Fed rate cut
Bitcoin is steadying above $91,000 at the time of writing on Friday. Ethereum remains above $3,100, reflecting positive sentiment ahead of the Federal Reserve's (Fed) monetary policy meeting on December 10.
Week ahead – Rate cut or market shock? The Fed decides
Fed rate cut widely expected; dot plot and overall meeting rhetoric also matter. Risk appetite is supported by Fed rate cut expectations; cryptos show signs of life. RBA, BoC and SNB also meet; chances of surprises are relatively low.
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