Point and Figure (P&F) charts are quite unique to Technical analysis. P&F charts provide a simple, yet disciplined method of identifying current or emerging trends in stock prices.
Characteristics of Point and Figure charts
- They are usually constructed with X's and O's instead of lines or bar
- X's represent sequential up movements in price.
- Os represent sequential down movement in price.
- The X's and O's are called 'boxes'.
- There is no time scale along the horizontal X axis.
- The columns of X's and O's represent demand and supply.
- Volume is not shown on Point and Figure chart.
Point & Figure Calculation
By convention, the first X in a column is plotted one box above the last O in the previous column, and the first O in a column is plotted one box below the highest X.
Point and Figure Box Size
Each X indicates that the price has increased by one box. The fact of Point & Figure charting is that the smaller you make the boxes and retracement criteria, the closer you will see the market characteristics. To start out, traders and investors should begin with smaller boxes to learn the nature of the market. However, as time goes by, you will want to extend the box sizes to larger sizes. You should keep multiple Point and Figure charts to compare. Software package at Stockcharts (stockcharts.com) should come in handy for you.
Point and Figure Reversal
A column of X's represents a price advance and a column of O's represents a retracement. A price reversal equal to one box size will result in the formation of a new column.
1-box reversal charts
1-box reversal is the original type of Point and Figure chart, though this method is rarely used by traders and investors. A 1-box reversal means that if the price retraces by the value of one box, an up column will changes to a down column or conversely a down column will change to an up column.
Take a look at this chart...
This is the Point and Figure chart of the Vectors Gold Miners ETF (GDX). The box size is 0.50 and the reversal is 1-box. Notice how easy it is to see the nice clear uptrend.
3-box reversal charts
On 3-box reversal charts, a new column is started each time there is a reversal of the value of 3 boxes or more. Prices reversal of less than 3 boxes are ignored.
Below is an example of a 3-box reversal Point and Figure chart. The box size is 0.50.
Using 3-box reversal will eliminate a lot of noise in the markets. Notice also, there is no gaps and no volume display on the chart.
Analyzing Point and Figure charts
Before you draw your Point and Figure chart on any software, there are a number of decisions you must make. You need to decide what data (close only price, high/low price), what box size and reversal size and finally time intervals. Your choices will affect the look of the chart and ultimately your analysis.
Questions you need to ask yourself are:
- Are you taking a short, medium, or long-term view?
- What box size should you use?
- What are the ratracement criteria? 1-box or 3-box?
- Do you wish to use 15-min, 60-min or daily chart?
As I noted earlier, you might even need to keep multiple charts for your analysis.
