Point and Figure Charting by Darren Winters
Point and Figure Charting
We have had a number of readers ask us what Point and Figure Charting is, so hopefully the following article may provide you with the basics.
It is believed that Point and Figure (P&F) charts have been used since the 1880’s. It was not until 1896 that the daily high, low and closing prices were published by the Wall Street Journal. Due to how the P&F charts are constructed they are not easily programmed into a computer thus their popularity seems to come and go. The original method of using P&F charts was based on intraday price moves although some chartists will now use end of day data for longer term trend analysis.
P&F charts differ from those of normal bars and candlesticks which use the open, high, low, close format in that they are based on trend development and supply and demand. This will become clearer in a moment.
Probably the key difference though is that time is not used. For some analysts this is a key omission, as the only constant in all markets is time, a parameter that is key to the Market Matrix methodology. With P&F charts if the price was to stay the same for most of the day you would have just one point on the chart, whereas if it was to move around significantly you would have a long chain which is shown in the examples below.
CONSTRUCTING A P&F CHART
To construct an P&F chart you will need some graph paper although you can use an excel spreadsheet by simply reducing the column width.
As already mentioned, P&F charts are constructed purely on price, thus there is only one relevant axis. The price movement is measured in what is termed the ‘box size’, this is the amount that the price needs to move before the next point is put on the chart. In the basic example shown below, I have used a $1 move or box size. Here we start with the previous days close at $96, thus we put a X alongside the $96.
In the second example below we show a quiet days trading where the stock opens at $96 and then moves up slightly to $98.30 before declining and closing at $95.32. You only move to a new column once the price reverses and the same price point is repeated in this new direction. Now you will note I have used O’s when the price is falling. Not all users bother doing this although it can make the move down look easier on the eye. As can be seen there are relatively few points within the quiet day. Conversely for just part of a more volatile day the chart is much larger.
There is one other element to consider when using P&F charts that affects the sensitivity. It is referred to as the ‘reversal amount’. This is the number of boxes (an X or an O) required to cause a reversal. A reversal would be represented by moving the next column and changing direction. In the examples I have shown it is set at just one. If you were to set it to a higher number, this would reduce the number of columns removing the noise of the smaller moves thus just showing the bigger trends.
TRADING SIGNALS
As with bar and candlestick charts, P&F charts display a similar group of trading patterns. The most common pattern is the consolidation zone. Here the price moves back and forth between two well defined price points. When it is doing this we can assume that supply is meeting demand. As soon as we see a move outside of this range it suggests that there will be a breakout. It is at this point that we place a trade as shown in the example to the right.
The longer the period of consolidation the stronger the potential break out. This breakout suggests that the balance in supply and demand no longer exists.
Another feature with this method of charting is that you can calculate a price objective. This is based on the relationship between the width of the congestion (consolidation) and the subsequent price move.
This is done by counting the number of columns across from the beginning of the consolidation up to the point of the breakout/ breakdown. You then find the centre point of the consoldation, this is the row that has the most points on it (x’s & o’s). You then count either up or down that number, this gives you the price objective.
In the example to the on this page, we have 7 columns across from the beginning to the end of the move. The centre point is $96, so we would subtract 7 rows giving us a price objective of $89.
This is a time consuming way of producing charts, but it can be used successfully for intraday trading, as it cuts out the noise and can give you some clear buy and sell signals and price objectives.
Regards Darren Winters
We have had a number of readers ask us what Point and Figure Charting is, so hopefully the following article may provide you with the basics.
It is believed that Point and Figure (P&F) charts have been used since the 1880’s. It was not until 1896 that the daily high, low and closing prices were published by the Wall Street Journal. Due to how the P&F charts are constructed they are not easily programmed into a computer thus their popularity seems to come and go. The original method of using P&F charts was based on intraday price moves although some chartists will now use end of day data for longer term trend analysis.
P&F charts differ from those of normal bars and candlesticks which use the open, high, low, close format in that they are based on trend development and supply and demand. This will become clearer in a moment.
Probably the key difference though is that time is not used. For some analysts this is a key omission, as the only constant in all markets is time, a parameter that is key to the Market Matrix methodology. With P&F charts if the price was to stay the same for most of the day you would have just one point on the chart, whereas if it was to move around significantly you would have a long chain which is shown in the examples below.
CONSTRUCTING A P&F CHART
To construct an P&F chart you will need some graph paper although you can use an excel spreadsheet by simply reducing the column width.
As already mentioned, P&F charts are constructed purely on price, thus there is only one relevant axis. The price movement is measured in what is termed the ‘box size’, this is the amount that the price needs to move before the next point is put on the chart. In the basic example shown below, I have used a $1 move or box size. Here we start with the previous days close at $96, thus we put a X alongside the $96.
In the second example below we show a quiet days trading where the stock opens at $96 and then moves up slightly to $98.30 before declining and closing at $95.32. You only move to a new column once the price reverses and the same price point is repeated in this new direction. Now you will note I have used O’s when the price is falling. Not all users bother doing this although it can make the move down look easier on the eye. As can be seen there are relatively few points within the quiet day. Conversely for just part of a more volatile day the chart is much larger.
There is one other element to consider when using P&F charts that affects the sensitivity. It is referred to as the ‘reversal amount’. This is the number of boxes (an X or an O) required to cause a reversal. A reversal would be represented by moving the next column and changing direction. In the examples I have shown it is set at just one. If you were to set it to a higher number, this would reduce the number of columns removing the noise of the smaller moves thus just showing the bigger trends.
TRADING SIGNALS
As with bar and candlestick charts, P&F charts display a similar group of trading patterns. The most common pattern is the consolidation zone. Here the price moves back and forth between two well defined price points. When it is doing this we can assume that supply is meeting demand. As soon as we see a move outside of this range it suggests that there will be a breakout. It is at this point that we place a trade as shown in the example to the right.
The longer the period of consolidation the stronger the potential break out. This breakout suggests that the balance in supply and demand no longer exists.
Another feature with this method of charting is that you can calculate a price objective. This is based on the relationship between the width of the congestion (consolidation) and the subsequent price move.
This is done by counting the number of columns across from the beginning of the consolidation up to the point of the breakout/ breakdown. You then find the centre point of the consoldation, this is the row that has the most points on it (x’s & o’s). You then count either up or down that number, this gives you the price objective.
In the example to the on this page, we have 7 columns across from the beginning to the end of the move. The centre point is $96, so we would subtract 7 rows giving us a price objective of $89.
This is a time consuming way of producing charts, but it can be used successfully for intraday trading, as it cuts out the noise and can give you some clear buy and sell signals and price objectives.
Regards Darren Winters
posted by Darren Winters at 11:48 AM
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