Adaptive Point-and-Figure Compression
Change chart resolution as price and trend scale expand
- Difficulty
- Advanced
- Time to result
- ~months to results
- Steps
- 5
- Confidence
- 97%
Begin with a one-point reversal chart to observe detailed short-to-intermediate price behavior. If the security advances substantially or the pattern becomes unwieldy, condense the horizontal dimension by rebuilding it as a three-point reversal chart. For high-priced securities, also enlarge the vertical unit so that an X or O is added only after a more meaningful price change. These adjustments reduce noise and physical chart size while retaining the structure of accumulation, distribution, breakouts, and failed moves. The analyst does not choose a single permanent resolution; resolution adapts to the magnitude of the security and the duration of its trend. The output is a chart whose scale remains useful as market conditions evolve.
Origin
Extracted from Masters in Business, where Alan Shaw described the point-and-figure practices he used during the high-flying markets of the 1960s.
Core principles
- 01Begin with detailed price movement before compressing it
- 02Match chart resolution to the scale of the trend
- 03Compress horizontal and vertical dimensions independently
- 04Preserve meaningful supply-and-demand structure
How to run it
- 1
Build the detailed chart
Start with a one-point reversal chart and update it consistently. Use it to learn how the developing trend expresses supply and demand.
Pro tip Construct or update some charts yourself to strengthen pattern recognition.
Watch out Starting with excessive compression can hide early changes in behavior.
- 2
Watch for scale expansion
Notice when a security's price rises substantially or its chart becomes too wide to interpret efficiently. Treat that expansion as an invitation to reconsider resolution.
Pro tip Evaluate readability rather than switching scales at an arbitrary date.
Watch out Do not compress merely to make an inconvenient signal disappear.
- 3
Condense the reversal threshold
Rebuild the chart with a three-point reversal to reduce horizontal width while covering the same period. Compare it with the detailed chart before relying on it.
Pro tip Retain the original chart as a higher-resolution reference.
Watch out The compressed chart should summarize the evidence, not replace all detailed observation.
- 4
Adjust the vertical unit
For a high-priced security, use a larger unit such as five or ten points. Require price to move by that unit before adding the next mark.
Pro tip Choose a unit proportionate to the security's normal price movement.
Watch out An oversized unit can suppress meaningful reversals.
- 5
Validate preserved structure
Confirm that important rallies, declines, breakouts, and failures remain visible after compression. Use the smallest scale that produces a clear and manageable chart.
Pro tip Look for the same supply-and-demand story across resolutions.
Watch out Do not interpret artifacts created solely by a scale change as new market evidence.
In the wild
A stock begins near $20 on a one-point reversal chart and later trades near $60. The analyst creates a three-point reversal version and increases the vertical unit, making the full trend readable while retaining the original chart for detailed inspection.
→ The analyst can evaluate the mature trend without an excessively wide or noisy chart.
Common mistakes
Using one resolution forever
A scale useful near $20 may become noisy and unwieldy after the stock triples.
Compressing before learning the detail
Beginning with a coarse chart can hide the short-to-intermediate behavior that teaches how the trend formed.
Is it for you?
Best for
It is best for point-and-figure analysts following securities whose prices or trends have expanded substantially.
Not ideal for
It is not ideal for analysts unfamiliar with constructing and interpreting basic point-and-figure charts.
From the transcript
“if you want to be a point and figure advocate, start with the one point reversal.”
“If you start with the one point reversal and then make a three point reversal, a pattern that was this wide perhaps can become this…”
“And you can see you can reduce your horizontal and your vertical”
From the episode
Alan Shaw Says the Days of Charting Stocks By Hand Are Over
Alan Shaw