Point and Figure has been proven to accurately predict markets, both by traders and by independent research studies (we'll go over this research in another article).
First things first- to make money using Point and Figure you need to know how to read trendlines and patterns.
Bull’s-Eye Broker can display trendlines automatically if you want. But you still need to be able to read trendlines and patterns to know what they mean and take advantage of all that Point and Figure charting has to offer. If you're new to this don't worry - reading trends and multiple patterns will become second nature after just a few charts.
Mastering trends, trendlines and patterns will give you the ability to easily scan all your target stocks, markets or industries to identify possible trends.
Point and Figure short term trends are shown as columns of X’s for uptrends or columns of O’s for a downtrend.
If a trend continues over multiple columns, the trend line is drawn as continuous dashed lines.
For example, below you can see two dashed trend lines. The first is an uptrend. The second is a downtrend.
The Point and Figure method tells us that if the market is in an uptrend there is a high probability that the uptrend will continue until the weight of evidence suggests that it has been reversed.
If a stock or any market is in a downtrend it will most probably continue until we can collect enough evidence to suggest that the downtrend is over and a new uptrend has begun.
The trend reversal is clearly depicted in Point and Figure charts. Unlike other methods where you need to use your judgement in order to determine if there has been a trend reversal, in Point and Figure you immediately see that the figures have turned from X’s (uptrend) to O’s (downtrend) or vice versa.
This Point and Figure principle has held true for more than 100 years. Identifying these trends is the first step in chart reading or technical analysis. Luckily, this process is extremely easy with Point and Figure charts.
Trends in stocks, forex, futures or any other security are caused by the forces of supply and demand: prices rise when demand is greater than the supply, and likewise fall when supply is greater than demand.
Trendlines are important tools in technical analysis for trend identification and trend confirmation, as well as identifying when a definite trend reversal has taken place. Trendlines are also used to measure the bullishness or bearishness of a stock. The steeper the trend line, the more bullish or bearish it is.
In standard Technical Analysis a trendline is drawn as a straight line which connects two or more price points and then extends into the future to act as a line of support and resistance.
Standard Technical Analysis UP TRENDLINE at the right. The stock price touches the trend line at points 1, 2 and 3 and continue the trend upwards.
An up trendline has a positive slope and is formed by connecting two or more low points as shown in the above chart. The second low must be higher than the first for the line to have a positive slope. Up trendlines suggest that demand is increasing as prices rise. Up trendlines also act as areas of support. As long as prices remain above the trendline the trend should be assumed to continue up. Only a breakdown of prices below the trendline indicates that demand has weakened and a change in trend could be imminent.
Standard Technical Analysis DOWN TRENDLINE at the right. The stock price touches the trend line at points 1 and 2, and then continue the trend downwards. At the end of the chart we can anticipate that the stock price will touch the trendline one more time.
A down trendline has a negative slope and is formed by connecting two or more high points as shown in the above chart. The second high must be lower than the first for the line to have a negative slope. Downtrend lines suggest that demand is decreasing, and supply is becoming greater than demand. Down trendlines also act as area of resistance. As long as prices remain below the trendline the trend should be assumed to continue down. Only an upside of prices above the trendline indicates that demand is strengthening and a change in trend could take place.
As you already know, Point and Figure charts are made up of columns of X’s and O’s. By definition, a column of X’s is an uptrend in the short term. As prices go higher you add X’s to the column. A series of X’s on top of each other is an uptrend. Once the prices reverse and you move into the next column and start adding O’s you have a downtrend.
You can immediately tell if the stock is in a bullish uptrend or a bearish downtrend, just by looking at the latest figure - is it an X or an O? It doesn't get any simpler than that.
In a standard Technical Analysis chart you can’t tell if the next few bars is an uptrend or a downtrend - they could simply be erratic “inside bars” or even a quick counter trend in a short term trend. All of this can be very confusing, especially to a new trader or one that is not experienced in reading charts. With Point and Figure you can avoid this confusion entirely. Point and Figure filters out insignificant price moves. New figures are not added at all unless the price move is significant enough to get a new X or O.
Traditional Technical Analysis Trendlines are a powerful tool for traders, but are often hard to use in practice. It is easy to do it in theory and add a trendline to a historical chart. But drawing trendlines in a real-time situation, or on a current chart can be confusing.
Point and Figure is much easier to draw trendlines with. Because they’re so easy to find, you don’t have to work to find them. In point and Figure all trendlines are drawn diagonally in 45 degrees, or negative 45 degrees ("135 degrees"). When using Bull’s-Eye Broker you just point and click where you want to add a trendline.
Point and Figure trendlines are usually drawn at the time of the first point and figure pattern in a chart. (we’ll go over Point and Figure patterns in detail in another series of articles).
When there’s a bullish entry signal you simply add the trend line at the bottom of the column. When there’s a bearish entry pattern you add the trendline at the top of the column.
The real beauty of Point and Figure trendlines is that they stretch into the future, without having to connect the trendlines to “higher highs” or “lower lows”. You only need one point in the chart to have a powerful trendline that will help you stay with a trend and make money.
You can also add trendlines wherever you want in the chart. This is perfect for identifying and following up short term trends as well as long term trends.
With Bull’s-Eye Broker P&F software you even get fully automatic trendlines - you can let program decide where to add the trendlines based on defined rules resulting from research. Just click the option for automatic trend lines and Bull’s-Eye Broker will identify the trends for you.
Identifying trends is the first step in technical analysis and key to making successful trades. The Point and Figure method makes this step completely automatic. These trends help us predict where stock prices will go with a high degree of accuracy.
Standard Technical Analysis and Point and Figure trendlines can be used together to increase confidence in your trades.
These tools are also used to detect trend reversals. Trendlines and formations on the Point and Figure chart can also be used as key support and resistance points. These tools are a must in reading charts and applying technical analysis successfully.
The benefit of having automatically drawn trend lines is huge. You do not have to rely on judgement - the trend lines are drawn automatically at the right places - proven through years of research and experience. The best way to start profiting from Point and Figure Trend Lines is to use specialized P&F software Bull’s-Eye Broker.