So in the previous post I said buy and hold isn’t the way to go. So you might be wondering what is the way to go? For those that want to get right to it, it’s point and figure charting.
Basically with point and figure charting you’re charting the price of a stock/mutual fund/or other investment property, but under some specific circumstances. Here’s how it works.
The stock is either in X’s, which means you’re on offense and trying to take money away from the market, or your in O’s, which means you should be on defense (for defense that means hedging or putting your money into cash).
In order for more X’s to be added the stock must go up by a point (there are other sizes, but for the purpose of this I’ll stay with 1 point). Nothing fancy there. For a stock to reverse into O’s the stock must drop by 3 points. The reason for the 3 point reversal has to do with market noise and such.
If a stock is in O’s and it drops another point, another O is added to the chart. If the stock goes up 3 points, we have a 3 point reversal and the stock goes to X’s.
Pretty simple eh? How about a sample.
Lets say we have a mutual fund (in your 401K) that has the following closing prices (mutual funds really don’t have closing prices…they have net asset values (NAV) ) for 10 days (these are just made up so bear with me).
Day 1 – 22.12
Day 2 – 23.19
Day 3 – 24.50
Day 4 – 22.34
Day 5 – 20.50
Day 6 – 22.00
Day 7 – 23.25
Day 8 – 23.95
Day 9 – 24.00
Day 10 – 24.25
28
27
26
25
24 X––X
23 X O X
22 X O X
21 —O
20
So the above is a short example of what a point and figure chart might look like. Let me talk through it.
Day 1 – We broke through the 22 dollar mark so we put an X on the chart.
Day 2 – Another great day we broke through 23 so another X goes on the chart.
Day 3 – We are starting to look pretty damn good..add another X to the chart.
Day 4 – Back to reality. The market drops and so does our mutual fund. But not enough for a 3 point reversal (needs to break through 21 for a reversal to O’s).
Day 5 – Now we get our 3 point reversal from 24.50. Put in 3 O’s (price goes through 21, but doesn’t go past 20; we would need to see 19 before we put an O in 20).
Day 6 – Market turns around for us, but not enough for a 3 point reversal up.
Day 7 – A reversal up but not enough to put in our 3 X’s. We need to move past 24 to get our 3 box reversal up.
Day 8 – Still no movement. Close but no cigar!
Day 9 – We get our 3 box reversal
Day 10 – No more X, but looks like we are moving upwards.
So there you have it. This is VERY cut and dried, but it gives you the idea. There are buy signals and there are sell signals that you can follow as well. I have not detailed those here. Simply following some sort of strategy like this will help your 401K our greatly.
For those that have mutual funds in their 401K and would like to watch the Point and Figure charts for their mutual funds I’d look to: http://www.stockcharts.com/
If you want to look into point and figure even more here are a couple of resources that you may want to purchase.
Point and Figure Charting – Tom Dorsey
Forget The Pie – Recipie for a Healtheir 401K – Ric Lager (this gives you a very brief overview, but much of the time is spent dispelling why the current 401K stuff doesn’t work. You need to take action).
If you have questions feel free to post them and I’ll do my best to answer them.
