OVERVIEW
All reversal charts share a common functionality: to filter out insignificant price movements below a user-selected range. The most popular is the point and figure (P&F)
chart. In this chapter and the following chapter, we explore the other variations within the reversal chart family so that traders may gain a modest acquaintance with alternative methods to P&F and diagonal swing charting.
GEOMETRIC CHART
The earliest reference to the geometric chart that we were able to locate is in the very informative book Point and Figure Method of Anticipating Stock Market Price Movements by Victor De Villiers and Owen Taylor (Traders Library, 1934).
This chart in theory displays the same information as a standard P&F chart except
that the columns of Xs and Os have been converted to vertical lines with interconnecting horizontal lines at the reversal points. Some traders may say the advantage of the geometric chart is that it has a cleaner, simpler visual presentation of the data, while an advantage of the standard P&F chart is that its component elements (Xs and Os) are readily countable. We emphasize that traders should use the method with which they feel most comfortable. In Figures 32.1 through 32.3 are examples of the geometric charts using different box sizes and reversal amounts.
TREND OUTLINE CHART
The trend outline chart can also be attributed to De Villiers and Taylor in the same book cited earlier. One diagonal line in the trend outline chart represents two straight lines in the geometric chart (one vertical and an adjacent horizontal line). Examples of the trend outline chart are provided in Figures 32.4, 32.5, and 32.6.
Readers will note the similarities between the trend outline chart and the swing
chart described in Part 3. The difference is that each subsequent vertex (either a peak or a valley) is equally spaced along the x-axis in the trend outline chart while peaks and valleys in a swing chart represent the actual time elapsed in the corresponding OHLC bar chart.
PIVOT CHART
The pivot chart (shown in Figure 32.7) is unique among reversal charts in that it requires no user-supplied parameters. This chart uses the interval high and low only, so that converting OHLC data to its equivalent closes-only time series is not necessary.
The underlying premise of the pivot chart is that once a trend is in motion then the
pivot algorithm favors the continuation of that trend. A reversal in direction is possible only when a continuation increment does not occur. For example, assume an upward trend has been established. The following rules apply:
•If the current high is greater than the previous high regardless of magnitude, then
the trend continues.
•If the current high is equal to the previous high, nothing is plotted.
•If the current high is less than the previous high, then the trend reverses and the
current low is plotted.
•The converse is true when the original trend is downward.
Technically there is a method by which the trader can increase or decrease the sen-
sitivity of the pivot reversal mechanism: change the time interval of the underlying data.
As the time interval increases (say from 1-minute-interval data to 10-minute-interval
data), the sensitivity decreases in terms of minimum fluctuation units. This phenome-
non occurs because the percentage of overlapping range between adjacent bars de-
creases as the time interval grows.
It may appear at first sight that a pivot chart is equivalent to a swing chart of the
same OHLC data using a single minimum price fluctuation as the box size and a reversal
amount of one unit. However, they do differ since the pivot chart shows a stronger bias toward showing continuation of an existing trend.
OBSERVATION
As long as creative technical analysts pursue the quest to display raw and processed data in innovative and revealing methods, no matter how bizarre or esoteric, charting theory will never become stagnant.
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