A Look At Point and Figure Charts

Point and Figure (P&F) charts differ from traditional price charts as they ignore the time factor and concentrate solely on movements in price. These charts help to filter out less-significant price movements and focus more on the most important trends. These point and figure charts are used to identify support levels, resistance levels and chart patterns. P&F charts display price changes on both axes.

These charts display the underlying supply and demand of prices. It is represented by a column of X's or O's. A column of Xs shows that demand is more than supply and the column of Os indicate a decline. When the supply is equal to the demand it is indicated by a series of short columns.

There are several chart patterns that regularly appear in point and figure charts. These include Double Tops and Bottoms, Bullish and Bearish Signal formations, Bullish and Bearish Symmetrical Triangles, Triple Tops and Bottoms etc.

Example

The following two charts both show the prices of XYZ Ltd.

The first chart displays prices in P&F. P&F charts focus on price action. This P&F chart shows that prices were initially limited between the support level at 94 and the resistance level at 102. When prices increased above the resistance level at 102 indicated by the long column of Xs this level became the new support level. This new support level eventually failed as indicated by column of Os, prices re-tested the support at 94, made a small rally, and then fell below the 94 support level.

The second chart displays prices as high, low and close bars. The chart and the support levels are the same. The resistance levels are also identifiable in this bar chart. This also shows that the P&F chart made it much easier to identify them.

Calculation of Point and Figure Charts

Each column can contain either Xs or Os, but never both. In order to change columns prices must reverse by the "reversal amount” multiplied by the box size. A price reversal equal to one box size will result in the formation of a new column. A method of further smoothing out fluctuations is to only record price reversals that exceed a set number of boxes. The number of boxes is called the reversal amount and a new column will not be started until price has retraced by that amount.

For example, if the box size is three points and the reversal amount is two boxes, and then prices must reverse direction six points in order to change columns.

The changing of columns identifies a change in the trend of prices. When a new column of Xs appears, it shows that prices are high and the other way round for Os. Because prices must reverse direction by the reversal amount, the minimum number of Xs or Os that can appear in a column is equal to the "reversal amount."