What is point and figure, and why should I care?
Point and Figure, or simply P&F, is by far one of the easiest ways for doing technical analysis of stocks, forex and commodities.
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At the right you see a point and figure chart. At a first glance P&F charts might seem strange. But once you have learned the basics - which you will do now within a few minutes - you will learn to love them, and always refer to them from here on.
The foundation of point and figure charts is the drawing of figures in straight columns in a grid chart. Each row in the grid corresponds to a price level. When the price is trending upwards we will draw X's. And when prices are trending downwards we will draw O's.
The X's and O's are the "points and figures" of the method. Each X or O is simply one price point in the price scale at the left hand side. When the price moves up one point we would add and X, and when price moves down one point we would add an O.
What happens when prices move up 4 points in a day? Like for example from $125 to $129? Then we simply add 4 X's in the chart. This is simple and logical.
This 1 point step in the price scale is what we call the "box size". You can think of the grid chart as small boxes that are either empty, or filled with an X or O. The box needs a whole point to be completely filled, so for a box size 1 - we simply need a full $1 price increase or decrease. The point and figure analyst can decide what box size to be used. For now we just use the box size 1 - later we will learn more advanced topics like how to use different box sizes.
Prices fluctuate up and down in waves
If prices would just move up all the time everybody would be millionaires, right? However, when you look at a regular bar chart, line chart, candlestick chart you notice that prices tend to fluctuate all the time - prices move up a bit, down a bit, up again, then down and so on. In other words the prices move in waves and it seems impossible to know when the turn will come and how long it will last.
Below you see how a candlestick chart fluctuates over a few months.
Point and figure has an ingenious way of handling these price fluctuations and waves. To begin with, we do not pay attention to small minor fluctuations. This simplifies the life for traders and investors considerably. In the modern world with the constant information overload that we are bombarded with, this will be If prices move a few fractions of a point up or down in a week, it does not matter in the big picture. We simply want to buy at $60 and sell at $75 - to give you a simple example. We don't have to care too much about how prices move in fluctuations between $60.07 and $72.14. We only care about how prices moved from about 60 to about 75 on the figure chart. Simple, right?
So, how about the waves and fluctuations downwards? How about when prices move back in a down wave, from $57.14 to $55.96? The simple, straightforward answer is - we don't really care. In our simplistic method, prices are still at around 57. Next up wave when price moves to $58.33 we just have to notice that the price moved up to 58. You as the point and figure chartist can decide when you want the price changes to be significant enough to cause a new trend column in the P&F chart. This is what we call the "reversal size". Most frequently the reversal size 3 is used. This means that we keep on drawing new X's until the price moves down at least 3 full points, or boxes.
To go through our example from the beginning of the P&F chart at the right, we are currently in the first column of X's with the last X at 59. Now price moves down 5 full points to $54. We thus move to the next empty column, and draw 5 O's. As we use a 3 point reversal size chart we would first draw 3 O's. At 58, 57 and 56. And as price continues down to below 54, we draw two more O's in the same colum. We would not draw one at 54 until price moves below $54.
Another reversal size that is sometimes used is the 1 point reversal. This means we wouldn't wait until the price trend has reversed 3 points, but we already move into the next column after 1 point. In this example we would have drawn an O already when pice moves below $58, and continue with a new O for each price point - 57, 56, 55, 54.
After the price hit $54 it started to move up again. We got a reversal of the price that was greater than the reversal size, so we moved into the next column. The price continues to rise to $66, then has a revesal down to $60, after which it continues the uptrend all the way to $75 - and we can close our trade for a big profit.
The three charts, first the bar chart, then the line chart and finally the P&F chart, all show stock movement, but in different ways. See how the P&F chart really simplifies the charting. And one more thing - this P&F chart shows two trading patters or trading signals during the example trade from 60 to 75. The trading signals are all covered in the free webinar, and we also go through them on the site in another article.
Congratulations! You have now learned the basics of point and figure. Some of it might still be a little bit confusing. But don't worry. You will become a true point and figure craftsman after a little practise. The best thing to do is start looking at some of our real point and figure charts.
You can also head over to our Online Point and Figure charts. Because when you start learning and putting your knowledge into practise in the markets, you will need a professional point and figure charting solution. Most investors and traders use PointAndFigure.com as we offer basic and advanced P&F charts, relative strength analysis, RS matrix, P&F pattern scanner - and last but certainly not least - market timing indicators.
See for yourself how you can start trading profitably and confidently already today. Our premium online charting service is found here: Online P&F Charts