Point and Figure Charts

Point-and-figure (P&F) chart is a special type of graphical analysis, which lays stress to prediction of medium-term
and long-term trends.


Conclusion

Lets single out advantages and disadvantages of Point and Figure charts.


Point and Figure Advantages

1. P&F charts send only clear buy or sell signals without any dual nature.
2. P&F charts take into account only important price changes and filter out market noise. This being said, the
importance of changes is set by a trader.
3. P&F charts are not affected by time effect, which sometimes introduces additional element of uncertainty on
general charts.
4. P&F charts allow to identify support and resistance levels, and also trend lines.
5. P&F charts are very intelligible.

Point and Figure Disadvantages

1. P&F charts send clear signals only for medium-term and long-term periods and are almost not intended for
short-term trade.


Building Point and Figure Charts

The majority of the most popular charts, used for technical analysis, are built in accordance with opening price,
closing price, maximum or minimum for a definite period. Only closing price for a period is used for building Point
and Figure charts.

Point and Figure charts consist of X and O columns, which reflect the filtered price changes. Increase in prices is
shown by X boxes, and drop in prices is shown by O boxes. New boxes are created only in case of price change by
the size of a box or more in one of directions.

As a result, each chart has a setting called box size conventional unit of price movement direction, which is
shown on a chart. Box size is an amount of pips, on which price should move above the current X box (or below the
current O box) for a new (or ) box to be created and added to the chart. For example, if price increased by three
conventional box sizes, it will be displayed on a chart like three X boxes.

If there is a reverse of price movement, a new column of O boxes will be displayed on a chart. This being said, X and
boxes never appear in one and the same column.

Besides, each chart has a setting called reversal threshold, which defines the amount of pips, necessary for a new
column to be created and a chart to start moving in the opposite direction (downwards, if a previous column was the
column of Xs, or upwards, if a previous column was the column of Os). When a reversal threshold is crossed by price,
a new column, which moves in the opposite direction, will be created next to a previous column.

Thereby, if securities move, for example, in ascending trend, a chart will show the growing column of Xs until these
securities move downwards for a distance more that a reversal threshold (as a rule, several boxes represent a
reversal threshold, for example, 3 boxes). The same situation occurs in case of appearance of a column of Os.

It is necessary to remember two important specific points:

1. There is no linear time scale on Point-and-figure charts, so each column can represent several minutes or
several days depending on price movement patterns.
2. There is no definite price value in a box on Point-and-figure charts. On the contrary, a certain range of price
values is displayed, which is situated within the limits of the box size.



Point and Figure Charts Signals

- Reversal pattern signals

Appearance of a new column of Os is a signal to sell.
Appearance of a new column of Xs is a signal to buy.

- Support and resistance levels

Support and resistance levels are always horizontal lines because of specifics of Point and Figure charts. Support level
appears on Point and Figure charts if there is a row of successive O columns, which minima are situated on a level.
Resistance level appears on Point and Figure charts if there is a row of successive X columns, which maxima are
situated on a level.

You should remember that the XO chart doesnt point to a specific level, but to a support zone (equal in size to the
box size), because arrangement of minima of several successive O columns on a level doesnt mean that prices have
stopped exactly on this level, but indicates that prices simply havent passed below more than one box. The same is
true of resistance levels.

- Trend lines

Support and resistance levels are always lines with 45-degree slope because of specifics of Point and Figure charts.

It should be noted that in most cases the current position of a trend line on a Point and Figure chart is not match the
position of the same line on a bar and candle chart in point of price. There are two reasons: firstly, Point and Figure
chart doesnt reflect the real minima and maxima of the market, but only points to their position in the diapason of a
box; secondly, time scale is non-linear.

Point and Figure Charts Patterns

Double Top and Double Bottom Patterns



These two patterns are the simplest trading signals on a Point and Figure chart. A double top signal is a signal for
buying, which appears when a column of Xs goes beyond the top of the previous column of Xs. A double bottom
signal is a signal for selling, which appears when a column of Os goes below the bottom of the previous column of
Os.

In order to identify double top or double bottom patterns you should single out three columns, and it would be
enough. Double top or double bottom patterns only help you to understand when a price reaches a position higher
or lower than the previous one. These patterns also indicate that price movement is likely to continue in the
direction of the breakout. You can use double top and double bottom patterns for identifying short-term trends.

Simple identification of stop-loss points should be specially singled out among many useful features of Point and
Figure charts. For example, a trader can identify the price, where the breakout occurs, and place a stop a bit lower
this price. In case of a false breakout the market will go back to the congestion zone right away, taking position
above the new minimum, marked by double bottom, or below the new maximum, marked by double top. If there is a
real breakout, your loss will make no more than a few pips.


The Triple Top/Bottom Patterns



A triple top pattern is a more complex signal for buying. In this case one column of Xs should go above the top of two
columns of Xs. The Triple Top signal means that the momentum is strong. It also indicates that bulls couldnt to push
the price above a certain price level two times in the past. A triple bottom pattern is a more complex signal for
selling. In this case one column of Os should fall below the bottom of two columns of Os.

In order to form the Triple Top/Bottom pattern there must be at least five columns. The more columns are in Point
and Figure patterns, the larger price targets are and the more dramatic the breakouts are.

When the triple top pattern or the triple bottom pattern signals you about possibility to buy or to sell, you should
determine a strategic price target. It is usually done by means of multiplying the number of columns within the
pattern by the box size. For instance, if a pattern is six columns wide and the box size is 0.5, then the $3 target in this
case exceeds the risk by a factor 3/1, thus making this trade very attractive.

Look at the Picture 3 and you will see how Point and Figure patterns can be used as trading strategies. The double
bottom sell signal is placed near $18. There are three possible decisions in this case: buying put options, closing long
positions or selling short. At least, it would be wise to think about closing long positions in case of Point and Figure
chart showing a sell signal. Point and Figure chart is created to filter out market noise, i.e. it takes into account only
important price changes. Thus, Point and Figure chart should reliably show changes in the trend.







Point and Figure Charts Patterns - Summary Table

XO Bearish Support


XO Bullish Support


XO Descending Triple Bottom

XO Double Top


XO Head-Shoulders


XO Rectangle


XO Spread Triple Bottom


XO Triple Bottom




Short Selling to Profit

It happens that traders try to sell the stock short. In this case traders simply sell a stock they do not own. In order to
do this, traders have to use a margin account, and it is a very risky initiative. In case of placing a short position
traders borrow the stock with a view to make profit from price declines. The borrowed stock should be repaid later
on. Moreover, traders must pay borrowing cost and other redemption fees. In case price goes higher traders will
need to cover losing positions by buying the stock back. Thereby, there is a very high percentage of risk of suffering
losses, while the gain is limited.


Buying a Put Option

Buying a put option is a more moderate strategy. In this case, you can make profit from price declines, but at the
same time you will be protected by limited risk. So you wont lose more that youve spent on purchasing the option.

Point and Figure Chart is a Very Useful Tool

No matter what strategy you have chosen, because all three of them would have been successful in the scenario,
which you can see on the Picture 3. Lets consider this case: as you see, the double bottom sell signal had occurred,
and then the stock went straight down and fell more than 50% during the next month. In case of buying put option
and selling short traders would have profited, but the amount of profit would have depended on time of closing their
positions. In case of closing long position a trader would have sold almost 10% from the highest price reached in the
previous rally.

XO Metatrader Indicator




Click to view More information about XO (Point and Figure) Indicator


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