Key Takeaways
- Point and figure charts show price movements and trends in an asset, ignoring time.
- P&F charts use columns consisting of stacked Xs or Os, each representing a set amount of price movement.
- The Xs illustrate rising prices and the Os represent falling prices.
- Some say that P&F charts define support, resistance, and breakouts better. They filter out tiny price movements.
- P&F charts are less susceptible to false breakouts.
Introduce Point and Figure (P&F) Charts
Investors use point and figure (P&F) charts for long-term investment strategies. They are one of the simplest systems for finding entry and exit points in stock trading. This system tracks each issue’s supply and demand, and trends. P&F charts are unique. They don’t account for time, unlike most other charts.
Point and figure charting has never been very popular among technical analysts. But, there is a growing interest in P&F from the charting community.
Constructing P&F Charts
The standard technical analysis chart is an open-close/high-low chart. It plots price movements over time, like from day to day. The emphasis is only on the closing price of an issue in the creation of a P&F chart. The developers of P&F charting expressed interest in developing trends. They weren’t concerned with the noise created daily by minor moves up or down. Their focus was on how the larger picture played out from a supply and demand perspective.
The key to P&F charts is the unit of price. It measures the price movement plotted on the graph. There’s no time axis on P&F charts, only a price axis. Rising stock prices are shown with Xs and falling prices are shown with Os.
These points appear on the chart only if the price moved at least one unit in either direction.
It would appear as a column of three Xs if the closing prices of a stock moved up one price unit three times. The chart shows a new column of Os if the price movement reverses direction. An O is plotted for each unit of movement. Xs and Os never appear in the same column. The chartist must find how many price units make a box. This is how much the price must move in the opposite direction for the chart to start a new column.
Example of a P&F Chart
Let’s say a stock you were tracking was trading at $25. You were using a $1 unit measurement, and a reversal box is three units. The stock would have to close at $22 before the chart would reverse to a column of Os if it had been trading upward to $25. In this new column of Os, each unit of price movement down from the $25 level must be represented by one O.
The next reversal would have the stock up at least $3 or three points. This is before a new column of Xs appeared on our P&F chart. Assume the issue continues to fall to $20 before reversing itself. The Xs would reappear when the price hits $23.
Remember, you choose the unit size. It could be $0.50, $1, or even $2 if the stock price is high enough. Graphically, the first two columns of our example would look like this:
| $25.00 | X |
| $24.00 | XO |
| $23.00 | XO |
| $22.00 | XO |
| $21.00 | X |
Reading P&F Charts
It’s clearly understood by P&F experts that the law of supply and demand determines the price of a stock. They believe that, if prices are rising and there are at least three Xs in an uptrend, demand has outstripped supply.
The reverse indicates that supply has overcome demand when the chart gives three Os. P&F charts show trends, trend reversals, and supply and demand.
Here are some examples:
This chart is a good start. It will help you study two key principles of P&F charting: support and resistance levels. Support and resistance are shown with horizontal lines and 45-degree trendlines.
Support Levels
A support level is a price where investors expect a bounce. They believe prices will rise after hitting it. Look at the three Os in the example above. A horizontal row of Os is what you’re looking for when you’re zeroing in on a trend reversal and an uptrend to begin.
Resistance Levels
A horizontal row of Xs marks the resistance levels you want to look for in the P&F charting study. Studies of trendlines have shown that, when they break resistance levels, it is with gusto, high volume, and a rapidly rising price.
