Point and figure charting

What this book actually teaches

Thomas Dorsey's book is the authoritative modern treatment of point and figure charting, a method of recording price movement that strips out time and volume entirely, plotting only significant price changes above a user-defined threshold. The core argument is that markets are driven by supply and demand, and that point and figure charts — by filtering out noise and recording only meaningful price moves — reveal supply-demand dynamics more clearly than time-based charts. Dorsey contends that this method, developed in the late 19th century and refined over decades, remains a reliable framework for both individual stock selection and relative strength analysis.

The book covers the mechanics of constructing point and figure charts in detail: how to set box size and reversal parameters, how to read the resulting X and O columns, and how to identify the classic patterns — double tops and bottoms, triple tops and bottoms, spread triple tops, catapult formations — that Dorsey argues have predictive value for price direction. More than a pattern catalog, the book explains why each pattern works in supply-demand terms, which helps readers apply the framework to novel situations rather than just memorizing shapes.

The relative strength section is arguably the book's most distinctive contribution. Dorsey builds a systematic methodology for ranking securities, sectors, and asset classes against each other using point and figure relative strength charts, then using those rankings to concentrate exposure in the strongest names within the strongest sectors. The bullish percent index — a market breadth indicator that tracks what percentage of stocks in an index are on point and figure buy signals — is explained as a tool for gauging overall market health and adjusting portfolio risk accordingly.

The weaknesses are worth naming. Point and figure charting is a tool for market timing and trend following, and the empirical evidence on whether such approaches consistently outperform buy-and-hold after taxes and transaction costs is mixed at best. Dorsey presents the method confidently with illustrative examples but does not engage rigorously with the academic literature on technical analysis efficacy. The 2007 edition is also dated in its discussion of tools and platforms — many of the software references are obsolete, though the methodology itself is platform-agnostic. Readers should also be aware that the method requires consistent maintenance; charts go stale quickly in active markets.

For technically-oriented investors and traders who want a systematic, rules-based approach to chart reading that is explicitly grounded in supply-demand logic rather than pattern mysticism, this is the best single source on point and figure. Use it alongside, not instead of, fundamental analysis.

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About Thomas J Dorsey

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