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34  FIVE-POINT PATTERNS Virtually all stock-price patterns can be neatly classified with the aid of a simple tool, the price filter. This approach connects high and low points on a chart where the swings between the points exceed a certain number of points or, more usefully, a certain percentage. A useful point filter might be as large as 100 points for the Dow Jones Industrial Average, or as small as 2 points for IBM. As the price levels change, these fixed-point amounts represent different percentage values. It is generally better to employ a percentage filter that has the same economic value at all price levels. Certainly for stocks, point filters really arent worth considering.1 An 8 percent filter would amount to %0 of a point at 10, but 8 points at 100, whereas an 8-point filter would be 8 percent at 100 and 80 percent at 10. These results are highly variable due to the wide
Chapter 11: Five-Point Patterns range of prices at which stocks trade, thus point filters are not comparable from issue to issue. Percentage filters between 2 and 10 percent usually work well for stocks and offer comparability from issue to issue. Figures 11.1 through 11.6 illustrate the percentage filter in action. Each chart depicts the same series, but employs a successively higher percentage price filter. The resulting zigzag lines eliminate an ever-greater amount of noise, until we reach the final example- Figure 11.6-where the entire chart is characterized by a single swing. The goal of these swing charts is to filter price sufficiently to clarify the patterns without eliminating important information. Another filtering method similar to zigzags or swing charts is point and figure. Point-and-figure charts, which may be the oldest Western stock charting method, are based purely on price swings, which are recorded without reference to time or volume. Point-and-figure charts are kept on square-ruled graph paper, and each individual portion of the grid is referred to as a box. Price levels are marked at the left, on the axis. Point-and-figure charts appear in the literature as early as the late 1800s, with references to "figure charts" being kept on the 5500 2500 - 4500 - 3500 -   1500 - 1/99 1/00 1/01 Figure 11.1 NASDAQ Composite, three years, no filter. The raw data.
Part III: Bollinger Bands on Their Own 5500  1/99 1/00 1/01 Figure 11.2 NASDAQ Composite, three years, 5 percent filter. The filter starts to clean things up. 5500  1/99 1/00 1/01 Figure 11.3 NASDAQ Composite, three years, 10 percent filter. Shows a pretty good picture of the important swings.
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