In an era of algorithmic trading, machine learning, and real-time data feeds, one of the most enduring tools in technical analysis is also one of the oldest — a charting method developed in the 1880s that ignores time entirely and focuses on nothing but the raw battle between supply and demand. Point and figure charting has survived more than 140 years of market evolution not because it's simple, but because the underlying logic it captures is timeless.
Understanding point and figure — how it works, where it came from, and how it connects to relative strength analysis — provides a window into how serious tactical investors think about markets.
A Brief History: From the Ticker Tape to Today
Point and figure charting traces its origins to the late 19th century, when stock prices were printed on long paper ticker tapes and traders had to work quickly to record and interpret them. The earliest practitioners — including Charles Dow, the founder of the Wall Street Journal and creator of the Dow Jones Industrial Average — began noticing that prices moved in patterns, that support and resistance levels repeated across time, and that supply and demand left recognizable footprints in price data.
The term "point and figure" was popularized in the early 20th century, with significant contributions from Victor deVilliers, who published what many consider the first comprehensive guide to the method in 1933. Throughout the middle of the 20th century, the technique was refined and systematized by practitioners including A.W. Cohen, who developed the box size and reversal rules that are still widely used today.
The method received its most rigorous modern treatment from Thomas Dorsey, whose work in the 1990s and early 2000s — particularly his application of relative strength to point and figure analysis — gave the technique renewed credibility among institutional practitioners. Today, point and figure methodology is used by quantitative analysts, portfolio managers, and tactical investors worldwide, with the Dorsey Wright research firm representing the most prominent institutional application.
Why It Survived
Most 19th-century trading techniques were eventually discarded as markets evolved. Point and figure survived because it doesn't rely on any particular market structure, communication technology, or regulatory environment. It relies only on the interaction between buyers and sellers — a dynamic that is as present in today's algorithmic markets as it was on the floor of the New York Stock Exchange in 1890.
How Point and Figure Charts Work
A point and figure chart looks unlike any other chart you've seen. There are no bars, no candlesticks, no volume histograms. The horizontal axis does not represent time — it represents changes in direction. The vertical axis represents price. The chart is built from two symbols:
- X's represent rising prices — a column of demand, buyers in control
- O's represent falling prices — a column of supply, sellers in control
The chart is constructed using two parameters:
Box size: The price increment each X or O represents. A $1 box size means each X or O equals a $1 move. A 1% box size — used in many modern applications — means each X or O represents a 1% price change, which scales the chart appropriately across securities at very different price levels.
Reversal amount: How much the price must move in the opposite direction before a new column begins. The most common setting is a 3-box reversal — meaning price must reverse by three box sizes before the chart shifts from a column of X's to a column of O's, or vice versa. This filters out minor noise and focuses attention on meaningful directional changes.
What the Chart Filters Out — and Why That Matters
Because point and figure charts only record price changes that meet the box size threshold, and only reverse columns when the reversal criterion is met, they automatically filter out the noise that clutters time-based charts. A stock that oscillates within a narrow range for six months produces no activity on a point and figure chart — the chart simply waits until a meaningful move occurs. This filtering property is one of the method's most powerful features: it shows you signal, not noise.
Buy Signals and Sell Signals
Point and figure charts generate objective buy and sell signals based on pattern recognition. The most fundamental:
Double Top Buy Signal: A column of X's that rises one box above the previous column of X's. This means buyers have overcome the previous high — a bullish development suggesting supply has been absorbed and demand is in control.
Double Bottom Sell Signal: A column of O's that falls one box below the previous column of O's. Sellers have pushed through the previous low — a bearish signal suggesting demand has been exhausted.
More complex patterns — triple tops, triple bottoms, spread triple tops, catapult formations — build on these fundamentals and are interpreted as progressively stronger signals. The patterns have a logic rooted in market microstructure: each signal represents a price level where buyers or sellers previously made a stand, and the breakout above or below that level represents a shift in the supply-demand balance.
Bullish and Bearish Price Objectives
One of point and figure's distinctive features is its built-in method for estimating price targets. Two methods exist:
The Vertical Count: After a significant move, count the number of X's or O's in the initiating column and multiply by the box size and reversal amount. This projects how far the move is likely to extend based on the momentum of the initial thrust.
The Horizontal Count: Count the number of columns in a consolidation base (the width of the pattern) and project that distance above the breakout point. The intuition: a long period of base-building stores energy; the wider the base, the more powerful the eventual move.
These price objectives are not guarantees — they are probabilistic targets based on historical pattern behavior. But they provide a systematic, objective basis for estimating reward potential that doesn't depend on fundamental analysis or earnings forecasts.
Point and Figure and Relative Strength
The most powerful application of point and figure methodology — and the one most directly relevant to how we approach investing at Dauble+Worthington — is its use in measuring relative strength.
Relative strength, in this context, means something specific: not the RSI oscillator commonly shown on trading platforms, but the direct comparison of one asset's performance against another. Which is stronger — this sector or that one? This stock or the S&P 500? This asset class or cash?
A point and figure relative strength chart is constructed by dividing the price of one security by the price of another — creating a ratio — and then plotting that ratio on a point and figure chart. The result is a chart that shows, cleanly and objectively, which of the two assets is winning the performance competition over time.
When the ratio chart is in a column of X's — meaning the ratio is rising — Asset A is outperforming Asset B. When it's in a column of O's, Asset B is outperforming Asset A. Buy signals on the ratio chart indicate that the relative leadership has shifted in favor of Asset A.
"Relative strength is not a timing tool — it is a selection tool. It tells you not when to be in the market, but where to be in the market."
Why Relative Strength Works
The academic basis for relative strength — sometimes called momentum — is one of the most robust findings in quantitative finance. Research spanning decades and multiple global markets consistently shows that assets that have outperformed recently tend to continue outperforming in the near term. The effect is persistent, pervasive across asset classes, and not fully explained by standard risk factors.
The behavioral explanation: investors are slow to update their expectations. When a company or sector begins improving, the full magnitude of that improvement is not immediately priced in — it diffuses gradually into the market price as more investors recognize and act on it. Relative strength investors are, in essence, identifying this diffusion process early and riding it.
The structural explanation: capital flows create self-reinforcing trends. Institutional investors managing large pools of capital cannot reposition instantly. When money begins flowing toward a sector, the process takes time — creating a trend that relative strength signals can identify and follow.
How Point and Figure RS Works in Practice
In a universe of securities — say, all eleven S&P 500 sectors — each sector can be measured against a benchmark (typically the S&P 500 itself or an equal-weighted index). The sectors with point and figure buy signals on their relative strength charts are ranked more favorably than those with sell signals. This creates an objective, systematic ranking of which sectors are leading and which are lagging.
The practical application: overweight the sectors showing relative strength leadership; underweight or avoid those showing relative weakness. Rotate as the signals change. This is not a prediction of which sector will lead — it is a systematic response to which sector is currently leading, based on the actual behavior of prices.
| RS Signal | Interpretation | Portfolio Action |
|---|---|---|
| Buy signal on RS chart | Asset outperforming benchmark | Overweight / favor |
| Sell signal on RS chart | Asset underperforming benchmark | Underweight / avoid |
| Column of X's (RS rising) | Relative leadership strengthening | Hold / add |
| Column of O's (RS falling) | Relative leadership weakening | Monitor / reduce |
Point and Figure in the Context of Tactical Management
At Dauble+Worthington, our investment process incorporates systematic analysis of both absolute price trends and relative price performance — the two dimensions that point and figure methodology is uniquely suited to measure. Absolute trend analysis tells us whether to be invested at all; relative strength analysis tells us where to be invested.
The appeal of point and figure in this context is its objectivity. The signals are rules-based, not discretionary. A buy signal is a buy signal regardless of what the news says, what the economic data shows, or what any analyst recommends. This removes the behavioral biases — recency bias, confirmation bias, loss aversion — that consistently damage investor returns when human judgment is applied in real-time under pressure.
The method's 140-year track record is not proof that it will always work — no method carries that guarantee. It is evidence that the underlying logic — supply and demand, trend persistence, relative leadership — are enduring features of markets, not artifacts of any particular era.
The Bottom Line
Point and figure charting is among the oldest systematic tools in technical analysis — and among the most logically coherent. By filtering out time and noise and focusing purely on price movement that exceeds a meaningful threshold, it creates a clear picture of supply, demand, and directional momentum. When applied to relative strength comparisons, it becomes a powerful selection tool for identifying which assets deserve capital and which do not. For tactical investors who believe that markets trend and that relative leadership persists, point and figure provides an objective, rules-based framework for acting on those beliefs — without the interference of emotion, narrative, or opinion.