Point & Figure Charts

POINT AND FIGURE CHARTS

Point & Figure charts consist of columns of X's and O's that represent filtered price movements over time. Their distinctive look may be alien at first to people who are more familiar with traditional price bar charts but once people learn the basics of P&F charts they usually become hooked.

There are several advantages to using P&F charts instead of the more traditional bar or candlestick charts. P&F charts

Eliminate the insignificant price movements that often make bar charts appear 'noisy.'
Remove the often misleading effects of time from the analysis process.
Make recognizing support/resistance levels much easier.
Make trend line recognition a 'no-brainer'.
Help you stay focused on the important long-term price developments.

After briefly discussing the history of P&F charting, we'll talk about how to construct a P&F chart by hand. Then we'll discuss how to interpret the most common P&F chart formations

History:-

Point & Figure chart analysis has been popular for a very long time. Part of its original appeal was that it was very simple for someone to maintain a large collection of P&F charts back in the days before computers. In less than an hour, using just a pencil, a newspaper and some graph paper, P&F chartists were able to update and analyze 50 or more charts every day. When computers arrived, they made it much easier to create bar charts and P&F charts started to fade in popularity. Recently however, as investors look for better ways to select stocks, Point & Figure charting has been 'rediscovered' and is once again growing in popularity.

This classic paper and pencil-based method was largely put aside as technology made charting easier, and charts became flashier.

          Point & figure (P&F) charts differ from "normal" price charts in that they completely disregard the passage of time and only chart changes in prices. Rather than having price on the y-axis and time on the x-axis, P&F charts display price changes on both axes. P&F charts display an "X" when prices rise by the "box size" and display an "O" when prices fall by the box size. Note that no Xs or Os are drawn if prices rise or fall by an amount that is less than the box size.

          Each column can contain either Xs or Os, but never both. In order to change columns (e.g., from an X column to an O column), prices must reverse by the "reversal amount" multiplied by the box size. For example, if the box size is 3 points and the reversal amount is 2 boxes, then prices must reverse direction 6 points (3 times 2) in order to change columns. If you are in a column of Xs, the price must fall 6 points in order to change to a column of Os. If you are in a column of Os, the price must rise 6 points in order to change to a column of Xs. The changing of columns signifies a change in the trend of prices.

          Because prices must reverse direction by the reversal amount, each column in a P&F chart will have at least "reversal amount" boxes. Indicators calculated on P&F charts use all the data in each column and then display the average value of the indicator for that column.

P&F charts are designed to display the underlying supply and demand of a security. A column of Xs shows that demand is exceeding supply (a rally); a column of Os shows that supply is exceeding demand (a decline); and a series of short columns shows that supply and demand are relatively equal.

There are several chart patterns that appear repeatedly in P&F charts. These include Double Tops and Bottoms, Bullish and Bearish Signal formations, Bullish and Bearish Symmetrical Triangles, Triple Tops and Bottoms, etc. It is beyond the scope of the manual to fully explain all of the possibilities.

How to create a Point and Figure Chart:-

On a P&F chart price movements are combined into either a rising column of X's or a falling column of O's. If you are familiar with standard chart analysis, you can think of each column as representing either an uptrend or a downtrend. Each X or O occupies what is called a box on the chart. Each chart has a setting called the Box Size that is the amount that a stock needs to move above the top of the current column of X's (or below the bottom of the current column of O's) before another X (or O) is added to that column. Each chart has a second setting called the Reversal Amount that determines the amount that a stock needs to move in the opposite direction (down if we are in a rising column of X's, up for a column of O's) before a reversal occurs. Whenever this reversal threshold is crossed, a new column is started right next to the previous one, only moving in the opposite direction.

In a nutshell, as long as a stock is in an uptrend and it doesn't move down more than the 'reversal distance' (i.e., the box size multiplied by the reversal amount), the P&F chart will show a growing column of X's. Similarly, a stock in a downtrend will cause a descending column of O's to appear. Only when the stock changes direction by more than the reversal distance will a new column be added to the chart.

Traditionally, the box size is set to 1 and the reversal amount is 3 (however, see below for the gory details).

Constructing a P&F Chart by Hand: -

The best way to really understand P&F charts is to create one by hand. All you need is a grid (graph paper is perfect), a pencil, and stock quotes. Only high and low prices are charted - the open and close are ignored. Here are the numbers we'll use for this example:

	High	Low
Day 1	15	11
Day 2	12	11
Day 3	12	10
Day 4	15	11
Day 5	15	12

Key Points before We Start: -

1. Remember, X's represent increasing prices (AKA demand). O's represent decreasing prices (AKA supply).
2. You can only have Xs or Os in any one column, not both.
3. The reversal distance is equal to the box size (in this case, one) multiplied by the reversal amount (in this case, three). Therefore, for this example, the reversal distance is three.

Day 1: High-15 Low-11

To begin, chart the difference between the first day's high and low. Since prices are falling, we'll start with a column of Os.

15	O
14	O
13	O
12	O
11	O
10

Day 2: High-12 Low-11

Now watch look for one of two things to happen. First, if the low moves lower by at least the box amount (in this case, one) we mark another O in the same column. Since that didn't happen on Day 2, look to see if the high is higher than the bottom of the current column plus the reversal distance (11+3=14). That didn't happen either. So for Day 2, we do nothing (!).

15	O
14	O
13	O
12	O
11	O
10

Note: Doing nothing is a totally acceptable (and common) action to take for a P&F chart.

Day 3: High-12 Low-10

Again, we look to see if the low moves lower by at least the box amount. It does. So we add another O to the column. (If the low had moved down two points, we would mark two O's.)

15	O
14	O
13	O
12	O
11	O
10	O

Day 4: High-15 Low-11: -

Since we're still in a column of O's, we check the low first. It does not move past the previous low, so we do not add another O. Then we see if the high was greater than or equal to the bottom of the column plus the reversal distance (i.e., 10+3=13). Since the high was 15, that means that the chart did reverse and we add five X's starting one above the low of the previous column.

15	O	X
14	O	X
13	O	X
12	O	X
11	O	X
10	O

Day 5: High-15 Low-12:-

Now we're in a column of X's, so we check the high first. It did not move up by a full box, so we next check the low. Since the low has moved down to the reversal threshold (i.e., the top of the column minus the reversal distance (15-3=12)), we reverse one more time and add three O's to the next column.

15	O	X
14	O	X	O
13	O	X	O
12	O	X	O
11	O	X
10	O

Over time, our chart might look something like this:

It is important to remember that P&F charts do not show time in a linear fashion. Each column can represent one day, or many days, depending on the price movement. Because P&F charts filter out the noise associated with more traditional charting methods, every mark on the chart is significant.

Some Sample Charts:-

Buy when the appearance of first "X" and hold on

Sell when the first "O" appears and wait for recovery

There are some patterns in the point and chart also.

At the most basic level, there are four things to look for:

Support levels
Resistance levels
Upward trendlines
Downward trendlines

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