Note: This article is courtesy of Iris.xyz
By Douglas Heikkinen
Dorsey Wright: Your Turnkey Portfolio Construction Solution
IRIS interviews Tom Dorsey, founder, Dorsey, Wright & Associates (DWA), to discuss the development of their fintech platform.
Dorsey, Wright & Associates (DWA), a Nasdaq Company, has been at the forefront of technical analysis and relative strength investing for decades. In this article, IRIS interviews Tom Dorsey, founder, DWA, to discuss the firm’s evolution and the development of their fintech platform:
IRIS: Can you provide an overview of the DWA relative strength concept?
Tom Dorsey: Point and Figure charting was created by Charles Dow, who was founder and editor of The Wall Street Journal. It was and is a logical, organized way of recording the imbalance between supply and demand. In the end, if there are more buyers than sellers, price must rise. If there are more sellers than buyers, price must decline. If buying and selling are equal, price must remain the same – there is nothing else. The Point and Figure charting method was developed using Xs and Os where X represents rising prices, and O’s represent declining prices, to plot the relationship between supply and demand within a given security in a logical, organized fashion. Because the chart uses price as its only input, the Point and Figure methodology is one of the simplest approaches to stock analysis, and it’s easy to understand and explain.
Point and Figure relative strength is a natural extension of this. Relative strength is something that we [DWA] have used for almost 30 years. It is a methodology of simply dividing one thing by another; for example, if I wanted to compare the price of Pepsi Cola to Coca Cola, I would divide the price of Pepsi by the price of Coke, and once that division is done, a number is generated, and you can plot it on a Point and Figure chart. This division is performed each day, and though there is not a change to the chart each day, over time, basic patterns develop and allow us to determine which security is exhibiting the best relative strength.
Thirty years ago, we could only create about 200 relative strength charts in a week, as it was time-consuming to create the relative strength charts by hand. We knew they were important but we just didn’t have the technology available to be able to run a large volume of these charts.
As technology began to advance and computers became faster, we were able to do more of them and, as a result, utilize more relative strength within our research. So as tech got better and better, we began to ratchet up the number of relative strength charts we did — first doing it on US equities, then starting to go around the world. Today, we calculate approximately 7.5 million relative strength charts every night. We compare everything to everything: we compare Indonesia to Spain, Spain to Malaysia, Malaysia to Hong Kong, Hong Kong to N. Korea or S. Korea, China. We compare everything, and the computer lays it out for us, exactly where the strength is and where the weakness is, because just like the Point and Figure chart, a buy signal is simply a column of Xs that exceeds the previous column of Xs, and a sell signal is simply a column of Os that exceeds a previous column of Os.