We have summarized seven studies on the profitability of the Point and Figure method as described by the world renowned and recognized experts in finance K.C. Zieg, Jr., (Ph.D.Professor of Finance and Investments) and H.A. Weber (Ph.D. & former Managing Director of Servisen Trading/QT Optec, partner and risk manager of Eurex member firm, DeTraCo).
Their expert studies show that the point and figure method is as simple and profitable as we and our clients have known for a long, long time.
First study
summary
• Analysis covered a period of only 135 trading days ending May 17, 1974.
• During the period there were 375 signals generated in two delivery months of 22
commodities.
• Of the 44 contract months analysed, 28 or 63.6% were profitable on a cumulative basis.
• Of the 375 signals, 150 or 40% were profitable.
• The average net profit after commissions per transaction was $306.48.
• The average duration of a position was 12.4 days.
• The total return was $114,930.71.
• The minimum margin investment being $64,400.
• The profit represented a 178.46% return on minimum margin (with minimum margin
defined as 10% of the contract value).
• The profit was realized in only 135 trading days, a period slightly over six months.
Second study
The results were very similar to the earlier study in terms of reliability, with the second study yielding 41% profitable trades compared with 40% in the first study. But in terms of profitability, the second study showed a 100% return on minimum margin, down from 178% earlier. The lower return on margin resulted primarily from the higher commodity prices and thus higher margins during the later period.
Third study
The contracts tested and the calendar period under review were held constant with the second study, while box sizes and reversal distances were changed to optimal values. This third study revealed that the profitability nearly doubled to 199% while the reliability increased by more than 50% to 66% meaning that two of every three trades were profitable.
Fourth study
Profitability of P&F commodity trading 1996-1997
There were a total of 261 total trades during the 12 months.
• 120, or 45%, of the trades were profitable.
• The average commodity had nearly 7 trades for the year, for an average duration of 52
calendar days.
• The net profit per trade was $238.98, representing a 79% annual return on initial margin.
In all three time periods, point-and-figure trading of commodity futures contracts was extremely profitable.
The average profit per trade was $311 in 1960-69, $306 in 1974 and $239 in 1997. The
reliability percentage (percentage of profitable trades to total trades) ranged from a high of 53% in 1960-69 to a low of 40% in 1974 and increased to 45% in 1997. Time duration was 49.8 days in 1960-69 and 52 days in 1997.
No matter how you view the results, it is obvious that p&f commodity trading is profitable.
Fifth study
If only buy signals were selected, the average net profit per long position increased to $452.48. The average annual profit was $648.55, representing a 26% profit on a cash transaction. If 50% margin was employed, the annualised return jumps to a respectable 52%.
Sixth study – using support and resistance lines
Using support and resistance lines makes p&f charting more complicated, but their
implementation had a dramatic impact on the results. Many of the whippy or losing transactions were eliminated while keeping the trader in a winning position for the major portion of a trend.
The results indicate that there were considerably fewer transactions (1080 versus 1730).
• Reliability (profitable trades as a percentage of total trades) increased from 41% to 47%.
• Average profit per trade showed a significant jump, increasing from $28.32 to $261.38.
• Duration of open trades increased from 95 to 152 days.
• The annualised return on an unleveraged or cash account also increased from 3% to 20%,
or from 6% to 40% if a 50% margin were employed.
Seventh study
Study looked at the frequency of point-and-figure signals and examined whether
they were wrong. The criteria for being wrong was established as generating the signal on the top or bottom of a column.
Results summary:
Total Signals 9,527 100%
Total False 2,715 28.50%
Total False Long 1,387 14.56%
Total False Short 1,328 13.94%
The results shown are highly valuable and encouraging for the trader as the results clearly
suggest that in more than 70% of the cases the point-and-figure signals are correct. Such a high number of accuracy has not been found – to the authors’ knowledge – in any other technical trading system. Moreover, the time horizon of 15 years is very long and therefore the results are statistically relevant. which translates directly into higher confidence while applying the p&f method for your own account. The long-term analysis makes clear that a 70% chance exists to be correct entering a position based on a p&f signal.
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Summary of research periods:
Research period: 1914-1964
It has been shown historically for the period of 1914 through 1964 that the traditional point and figure charting technique is an extremely reliable and profitable method for trading stocks on both the long and short sides. Typically, over 80% of all transactions were profitable, and profits averaged in the mid-20% range. Losses were rare, occurring less than 20% of the time, were small, generally around 15%, and were realised quickly in a matter of several months.
Research period: 1961-1969
It was also shown that for the period of 1961 through 1969, using optimal values for box sizes and reversal distances, the point-and-figure technique as applied to commodities was profitable 53% of the time, the average profit per transaction was $311, and the average duration of trades was 49.8 days.
Research period: 1974
The later studies of profitability results covering a period of 135 trading days ending May 17, 1974, using non-optimised box and reversal values (the generally accepted box sizes and the three-box reversal criterion in use during the study period), showed that 40.0% of all commodity trades were profitable, trades remained open for an average of 12.4 days, the average profit per transaction was $306.48, and the net return was a healthy 178.46% earned in just over six months.
Still later, a 1974 research has revealed that while sizable commodity returns were possible by taking positions on simple signals using the non-optimised approach, even larger returns and higher reliability occurred when an optimised technique was employed.
Research period: 1997
Subsequent research for both futures and stocks show a continuation of profitability for point and figure trading. For the 12 months ending January 10, 1997, trading in just one delivery month of 38 commodities, 45% of all trades were profitable, the average duration was 52 days and the average per trade profit was $238.98. This represents a 79% annual return on retail brokerage initial margin requirements. These figures are very similar to those found in all of the previous research studies.
Research period: 1994-96
Stock profitability of a randomly selected portfolio for the 3 years 1994-96 showed a small
annual profit of 3% on cash. When support and resistance lines were utilized in addition to
simple buy and sell signals, the profit increased to 20% on a cash investment. Where portfolio selection techniques were employed, such as randomly selecting stocks from the list of Value Line’s most timely stocks, and only simple signals were used, the annualised profit on cash was 26% if only long positions were traded, and 15% if all signals were employed. If 50% margin was employed, the returns increased to 52% and 30% respectively. The studies covered different time spans, different securities or commodities and employed different research methodologies, but the conclusions are obvious. Point and figure charting is a profitable trading tool, yielding a substantial return per transaction while permitting the users the satisfaction of understanding and participating in the decision-making process.
Research period: 1988-2003
In 2003 extensive studies on European stock portfolios were conducted.
Especially in the context of using volatility as the major indicator to choose parameter sets.
Once again, point-and-figure has shown to be an excellent approach to orchestrate one’s trading. Over a large sample size, 15 years, false trading signals averaged below 30% of the total number of signals.
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The conclusion is that few, if any, trading systems are so inexpensive to maintain, require so little time to keep current, are so readily comprehensible, provide such personal satisfaction, use so little mathematics and are so profitable.
For more information on the Point and Figure method, and free Point and Figure charting software trial download please visit http://www.pointandfigure.com
