Point and Figure charts are a part of Technical Analysis.
Point and Figure charts consist of columns of X’s and O’s that represent filtered price movements. X-Columns represent rising prices and O-Columns represent falling prices. Each price box represents a specific value that price must reach to warrant an X or an O. Time is not a factor in P&F charting. These charts evolve as prices move. No movement in price means no change in the Point and Figure charts. In classic 3-box reversal charts, column reversals are further filtered requiring a 3-box minimum to reverse the current column. The 3-box Reversal Method is the most popular P&F charting method.
Point and Figure charts provide a unique look at price action that has several advantages –
- Filter insignificant price movements and noise
- Focus on important price movements
- Remove the time aspect of the analysis process
- Make support/resistance levels easier to identify
Creating a P&F Chart
On a P&F chart, price movements are represented by rising X-Columns and falling O-Columns. Each column represents an uptrend or a downtrend of sorts. And, each X or O occupies what is called a box on the chart. Each chart has a setting called the Box Size, which defines the price range for each box.
There is another setting called the Reversal Amount that determines the amount that the price needs to move in the opposite direction to warrant a column reversal. Whenever this reversal threshold is crossed, a new column is started right next to the previous one, only moving in the opposite direction.
The “reversal distance” is the box size multiplied by the reversal amount. A box size of 1 and the reversal amount of 3 would require a 3 point move to warrant a reversal (1 x 3). An X-Column extends as long as price does not move down more than the “reversal distance”. Only when the price changes direction by more than the reversal distance will a new X-column be added to the chart.
P and Figure charts do not show time linearly. In contrast to bar charts, the spacing between price changes will not be symmetrical. The chart evolves only when there is a price change big enough to warrant a new X, a new O, or a new reversal column. Chartists can view the passage of time on a monthly basis. Numbers and letters on the chart indicate when a new month has begun. For instance, the number “2” shows where February started. The letters “A”, “B”, and “C” are used to indicate the beginning of October, November, and December.
Basic Point and Figure charts Analysis
There are four things to look for on Point and Figure charts:
- Support levels
- Resistance levels
- Upward trend lines
- Downward trend lines
Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. It is easy to spot support levels on P&F charts. In particular, a sequence of O-Columns with equal lows marks a clear support level.
Now, Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. Resistance levels are also easy to spot on P&F charts. In particular, a sequence of X-Columns with equal highs marks a clear resistance level.
Trendlines are drawn automatically on the Point and Figure charts. An upward sloping trendline is called a Bullish Support Line. A downward sloping trendline is called a Bearish Resistance Line. Bullish Support Lines slope up at 45 degrees and start from an important low. At a minimum, it takes a column sequence of 5-3-5-3-5-3 to produce an advance steep enough to maintain this angle. X-Columns need to be at least 5 boxes with O-Columns a maximum of 3 boxes. An X-Column greater than 5 would allow for an O-Column greater than 3.
Bearish Resistance Lines slope down at 135 degrees (180 – 45 = 135) and start from an important high. A similar ratio is needed to maintain the slope of a Bearish Resistance Line. A column sequence of 5-3-5-3-5-3 is needed to maintain the slope. O-Columns need to be at least 5 boxes with X-Columns a maximum of 3 boxes. An O-Column greater than 5 would allow for an X-Column greater than 3.
P&F Chart Patterns
For Point and Figure Charts there are many specific chart patterns. For 3-box Reversal charts. Here are some articles –