Point and Figure Charting

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  1. Point and Figure Charting

Point and Figure (P&F) charting is a unique type of technical analysis charting method that differs significantly from the more common candlestick and bar charts. Instead of plotting price over time, P&F charts plot price *movement* based on a predefined box size and reversal amount. This focus on significant price changes, rather than the timing of those changes, makes P&F charts particularly useful for identifying potential support and resistance levels, charting price targets, and filtering out market noise. This article aims to provide a comprehensive introduction to P&F charting for beginners.

History and Origins

The origins of Point and Figure charting can be traced back to the late 1930s, developed by Frank D. Siebel. Siebel, a stockbroker, sought a method of charting that would filter out insignificant price fluctuations and focus on meaningful price movements. He believed that time was not a crucial element in determining future price direction, and that price action itself held the key. His work, published in the book "Point and Figure Charting," laid the foundation for the modern P&F methodology.

Core Concepts

Understanding P&F charts requires grasping a few key concepts:

  • Boxes: The chart is constructed using boxes, typically of equal size. The size of the box represents the minimum price movement required to change the chart. For example, a 1-point box size on a stock trading at $100 means a price change of at least $1 is needed to trigger a new box. Choosing the right box size is critical (see section "Box Size Selection").
  • X's and O's: These are the two symbols used to build the chart. 'X's are used to denote upward price movement, and 'O's denote downward price movement.
  • Reversal Amount: This defines the amount of price change needed to reverse the direction of the chart. It is typically expressed as a multiple of the box size. For example, a reversal amount of 3 boxes with a 1-point box size means the price must move 3 points in the opposite direction to trigger a reversal.
  • Double Top/Bottom: These are crucial formations in P&F charting. A double top occurs when the price attempts to break through a resistance level twice but fails, forming a pattern resembling the letter 'M'. A double bottom forms a 'W' shape, signaling a potential breakout to the upside.
  • Trendlines: Similar to traditional charting, trendlines can be drawn on P&F charts to identify support and resistance levels. However, they are drawn differently (see section "Drawing Trendlines").

Constructing a Point and Figure Chart

Here's a step-by-step guide to constructing a P&F chart:

1. Choose a Box Size: Select an appropriate box size based on the volatility of the asset. (See "Box Size Selection" below). 2. Define a Reversal Amount: Determine the number of boxes required for a reversal. A common starting point is 3 boxes. 3. Start with the Initial Price: Begin the chart with a single 'X' column if the price is rising, or an 'O' column if the price is falling. 4. Add Columns of X's (or O's): Continue adding 'X's to the column as long as the price rises, but *only* if the price movement exceeds the box size. Similarly, add 'O's to a column as long as the price falls and exceeds the box size. 5. Reverse Direction: When the price moves against the current trend by an amount equal to the reversal amount, start a new column with an 'O' (if previously rising with 'X's) or an 'X' (if previously falling with 'O's). 6. Repeat: Continue adding columns and reversing direction based on price movements and the defined box size and reversal amount.

Example:

Let's say a stock is trading at $50. We choose a box size of $1 and a reversal amount of 3 boxes.

  • The price rises to $52. We add an 'X' column.
  • The price rises to $54. We add another 'X' to the column.
  • The price rises to $55. We add another 'X' to the column.
  • The price falls to $53. This doesn't trigger a reversal because the price hasn't fallen by 3 boxes.
  • The price falls to $51. This doesn't trigger a reversal because the price hasn't fallen by 3 boxes.
  • The price falls to $49. Now the price has fallen by 3 boxes ($52 - $49 = $3). We start a new column with an 'O'.
  • The price falls to $48. We add an 'O' to the column.

Box Size Selection

Choosing the correct box size is crucial for effective P&F charting.

  • Volatility: More volatile assets require larger box sizes to filter out noise. Less volatile assets can use smaller box sizes.
  • Timeframe: Longer-term charts generally benefit from larger box sizes.
  • Percentage Based: Some analysts prefer to use a percentage-based box size (e.g., 2% of the stock price).
  • Experimentation: There's no single "right" box size. Experiment with different sizes to find one that provides a clear and meaningful chart. A common starting point is 1% to 5% of the asset's price.

Drawing Trendlines

Trendlines on P&F charts are drawn along the *tops* and *bottoms* of the columns, not connecting individual price points as in traditional charting.

  • Uptrend Line: Connects the lowest points of successive columns of 'X's.
  • Downtrend Line: Connects the highest points of successive columns of 'O's.
  • Breakouts: A breakout occurs when the price penetrates a trendline. Breakouts are significant signals in P&F charting.

Patterns and Signals

P&F charts reveal several key patterns that can be used to generate trading signals:

  • Double Top/Bottom: As described earlier, these patterns indicate potential reversals. A breakout above a double top suggests a bearish reversal, while a breakout below a double bottom suggests a bullish reversal.
  • Triple Top/Bottom: Similar to double tops/bottoms, but with three attempts to break a level. These are generally considered stronger signals.
  • Bullish Saucer: Forms a rounded bottom pattern, indicating a potential uptrend.
  • Bearish Saucer: Forms a rounded top pattern, indicating a potential downtrend.
  • Rectangle: A sideways pattern formed by horizontal support and resistance levels. Breakouts from rectangles can signal strong moves.
  • Breakouts: A breakout occurs when the price moves beyond a trendline or a key support/resistance level. Breakouts are often accompanied by increased volume in traditional charts and are considered strong buy or sell signals.

Price Targets

One of the most powerful features of P&F charting is its ability to project price targets.

  • Measure the Height of the Pattern: Measure the vertical distance (in boxes) of the pattern (e.g., the height of a double bottom).
  • Project the Target: Project this distance upward (for bullish patterns) or downward (for bearish patterns) from the breakout point. Each box represents the defined box size.
  • Example: If a double bottom pattern measures 5 boxes in height, and the price breaks out above the pattern, the price target is 5 boxes above the breakout point.

Advantages of Point and Figure Charting

  • Filters Out Noise: Focuses on significant price movements, ignoring insignificant fluctuations.
  • Identifies Support and Resistance: Clearly highlights key support and resistance levels.
  • Projects Price Targets: Provides a straightforward method for projecting potential price targets.
  • Objective: The rules for constructing and interpreting P&F charts are relatively objective, reducing subjective bias.
  • Simple to Understand: Once the core concepts are grasped, P&F charts are relatively easy to interpret.

Disadvantages of Point and Figure Charting

  • Lagging Indicator: P&F charts are lagging indicators, meaning they react to price movements rather than predicting them.
  • Subjectivity in Box Size: Choosing the appropriate box size can be subjective.
  • Time is Ignored: The lack of a time dimension can be a disadvantage for some traders.
  • Not Ideal for Short-Term Trading: P&F charts are generally more suited for medium- to long-term trading due to their smoothing effect.

Combining P&F with Other Technical Indicators

P&F charting can be enhanced by combining it with other technical indicators:

  • Volume: Confirming breakouts with volume analysis can increase the reliability of signals. Look for increased volume during breakouts.
  • Moving Averages: Using moving averages on traditional charts alongside P&F can provide additional confirmation of trends.
  • Relative Strength Index (RSI): RSI can help identify overbought or oversold conditions, potentially improving entry and exit points. Relative Strength Index
  • Moving Average Convergence Divergence (MACD): MACD can provide insights into trend momentum. MACD
  • Fibonacci Retracements: Applying Fibonacci retracements to P&F charts can help identify potential support and resistance levels. Fibonacci retracement
  • Bollinger Bands: Using Bollinger Bands can help assess volatility and identify potential breakout opportunities. Bollinger Bands
  • Ichimoku Cloud: Integrating the Ichimoku Cloud can give a broader view of support and resistance and potential trend direction. Ichimoku Cloud
  • Elliott Wave Theory: Applying Elliott Wave principles can help identify potential wave patterns within P&F charts. Elliott Wave Theory

Resources for Further Learning

  • Books:
   *  Siebel, Frank D. *Point and Figure Charting.*
   *  Murphy, John J. *Technical Analysis of the Financial Markets.*
  • Websites:
   *  Investopedia - Point and Figure Charting
   *  StockCharts.com - Point and Figure Charting
  • Software:
   *  Most charting software packages (TradingView, MetaTrader, etc.) offer P&F charting capabilities. TradingView MetaTrader

Conclusion

Point and Figure charting is a powerful tool for technical analysts that offers a unique perspective on price action. By focusing on significant price movements and filtering out noise, P&F charts can help traders identify potential trading opportunities, project price targets, and manage risk. While it has limitations, when used in conjunction with other technical analysis techniques, P&F charting can be a valuable addition to any trader's toolkit. Understanding the core concepts, practicing chart construction, and learning to recognize key patterns are essential for success with this method. Technical Analysis Chart Patterns Support and Resistance Trading Strategies Market Trends Candlestick Patterns Forex Trading Stock Trading Day Trading Swing Trading Risk Management Trend Following Breakout Trading Position Trading Scalping Algorithmic Trading Arbitrage Options Trading Futures Trading Commodity Trading Cryptocurrency Trading Financial Markets Trading Psychology Market Volatility Trading Indicators Price Action Chart Analysis Trading Platform

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