tern should not depend on a single, very large profit, to work over time. It should have a successful, consistent profile. We can, therefore, reason that any extremely large profit is a windfall and should be taken.

If you cannot sleep nights because you need money to meet personal commitments, you have just the right amount in unrealized profits, and 1 or 2 adverse daj-s would ruin the opportunity, take the profits and begin again with a small investment. Technically, that is an issue of investor risk preference. If you want a logical place to cadi in on current open profits but you have some time and latitude, as long as you do not lose more than 10 to 25>o of the existing profits, use the point-andfigure reversal value. The reversal value, the box size times the number of boxes in a reversal (usually three), is meant to indicate a significant contrarj- move and can be used as an objective indication of a change of direction. One approach to taking profits is shown in Figure 11-10.

In Figure U-lOa, a trailing 3-box reversal value is used for the stop-loss once there is a sustained move of at least 10 boxes. To reenter the move in the same direction, the same technique is used (Figure U-lOb), adding another 4boxesof profits while keeping the new rid; small. In Figure 11- 10c. this method lost 4 boxes of the potential profits when the reversal was short-lived.

in general, taking small profits in this way does not improve profits, because it most often misses the biggest moves, it may, however, reduce the risk of loss at a rate even faster than the reduction in profits, yielding a better reward-to-risk ratio. A new rule should he carefully tested to know its effect on different market conditions. If successful, it should always be used. Selective use is more likely to limit potential profits without reducing losses. This topic is covered thoroughly in Chapter 21 ("Testing").

Altemate Treatment of Reversals

Traditional pomt-and-figure charting favors the continuing trend. On highly volatile daj-s, or outside daj-s, it is possible for both a trend continuation and a reversal to occur. Point-and figure rules require that the trend continuation be recorded and the reversal ignored-Figure 11-11 shows a comparison of the two choices. In the example, prices are in an uptrend when a new 1-box high and a 3-box reversal both occur on day 6. In Figure 11- 1 lb, the traditional approach is taken, resulting in a continuous upward trend with a stop-loss at 790. Taking the reversal first as an altemate rule. Figure 11-1 Ic shows the same trendwith a stop-loss at 805.

FIGUREII-10 Cashing in on profits.

FIGURE 11-11 Altemate methods of plotting point-and-figure reversals, la) Sample prices f Traditional method, (c) Alternate rule taken on day 6.

Plotting the reversal first will usually work to the benefit of the trader- both the stoploss and change of trend will occur sooner. Subsequent computer testing proved this to be true. The alternate rule will not help when the reversal value is small and the optional reversals, or outside daj-s, occur frequently.

PRICE OBJECTiraS

Point-and-figure charting has two unique methods for calculating price objectives: horizontal and vertical counts. These techniques do not eliminate the use of the standard bar charting objectives, such as siq3port and resistance levels, which apply here as well

The Horizontal Count

The time that prices spend in a consolidation area is considered important in determining its potential move. One technique for calculating price objectives is to measure the width of the consolidation (the number of columns) and project the same measurement up or down as the target of the move. The point-and-figure horizontal count method is a more exact approach to the same idea. The upside price objective is calculated as

To complete this formula, the base (width of the bottom or top formation) needs to he identified. Count the number of columns, W not including the breakout column and multiply width by the value of a minimum reversal, R; then add that result to the bottom point of the base to get the upper price objective. The base can ahvaj-s be identified after the breakout has occurred. For example. Figure II-I2 shows the March ~i contract of London Cocoa

(£4 box) forming a very long bur dear base The reversal value is £12, and the width of uie base is 19 columns (not counting the last column, which included the brealioui). Added to Ihe lowest point of ihe base (£570) this gix-es an obfectrt-e of £798, reached on ihe left shoulder of the topping formatron Another alternative is the wder base marked W 2 ~ Lsmg this selection results in a price objective of £870, by adding 25 £12 £300 to *!> i., trt lowest point of Ihe base.

The dowTKide objeciive is calculated m the same manner as the upside obiectire:

1 ¹Lini price f4l(CTjL¥ . »; lop favamw> lop luinainn (number dtolurnnsj

Soukt <;icaiTir>l<->i ari virn for clowrMiclcr cibjeciivcrs in ihcr same cocoa diagram (Figure i1-12j A small t-orrtttion top could bf isolated ai tht £"720 tcvcl arwj two fwblc lop wltlihs. W, atiil W,, coultl bo cboseii. W,. Ihc broader lop. has a width of > and a downside obitctivt- of irt3Z W, has a sinalier width t.f 5 and a dowiis.de objeciive ot*680. Although

bei aijsi it coincides wiih a stronj intei-mediatt upptirt u-vcl at ahoiit Jb<S40

The very top formation was small and only produced a nearby price objective similar to the first downside example., there would be no indication that prices were readj- for a major reversal. The top also forms a clear head-and-shoulders pattem, which could be used in the same manner as in bar charting to find an objeciive. The height of the top of the head to the point on the neckline directly below is 20 boxes; the downside price obj ective is 20 boxes below the point where the neckline was penetrated by the breakout of the right shoulder, at £776, giving £696 as an objective.

The horizontal count can also be applied to a breakout from a triangular formation, similar to the one on the very far right in Figure 11- 12 (marked "Head-and-shoulders objective"). The width of the formation, W, is the widest point in the center of the friangle, and the upward objeciive is also measured from the center, rather than from the bottom of the friangle.

The Vertical Count

The vertical count is a simpler and more definitive calculation than the horizontal count. As with the