Are you bored of the standard charts?
Candlestick, line, bar charts – they are all great, but today we’re going to discuss the point and figure chart.
The one that doesn’t factor in time and only focuses on price.
How does it work?
Find out below:
What is a Point and Figure chart?
A point and figure chart is a visual representation of price movements for the markets.
This type of chart only focuses on price action and does not take into account the passage of time.
It can reveal important information about how traders are feeling at any given moment.
Some believe that by only focusing on price, time is irrelevant because their trading decisions are based on price and not time.
As true as this statement is, in forex trading – timing an entry is important because you do not want to get caught in the middle of an FOMC tornado or an NFP announcement.
When looking at a P&F chart, technical analysis users may use the concepts of support and resistance, as well as other patterns.
They argue that these things are more clear in this type of chart because it filters out tiny price movements.
A point and figure chart is a type of forex trading chart that shows the sequence, direction, price movement, and volume.
They look like this:
These types of chart are best for traders who use technical analysis to predict price movements in forex trading markets as they can visualize trends, reversals, areas of support and resistance, etc.
They do this by showing support and resistance levels, which represent areas where prices tended to reverse before continuing in a new direction.
Traders use these high or low points to identify potential reversal zones for future price movements.
Traders can also use these charts to identify potential points of change in the direction and magnitude of a trading trend, as well as changes in momentum.
The Basics of Point and Figure Charts
A point and figure chart is a forex technical indicator that uses box size to represent absolute levels in the price movement.
Well-known traders argue that P&F charts are helpful when looking for support and resistance, breakout trends, or other pattern formations since they filter out considerable amounts of noise caused by small price movements.
These charts show how much the price has changed. Other charts use columns that are either Xs or Os. Ones represent an increase in price and Os mean a decrease in price
Here is the breakdown of a point and figure chart:
- An X is when the price goes higher by a set amount. An O is when the price goes down by that much.
- X’s and O’s will stack on top of each other. They often form a series of X’s or O’s.
- The box size is based on the price of the asset and what kind of trader you are. You can adjust it to your preference.
- If you want to see a new column of X’s or O’s, the price will need to go up or down by the same reversal amount. So if there are 3 Xs, to reverse there would need to be 3 Os.
We’ll continue to explain how to read point and figure charts below:
How to Read a Point and Figure Chart
Point-and-figure charts often provide technical analysts with different trade and trend signals, relative to traditional candlestick or bar charts.
While some analysts rely more heavily on the point-and-figure charts, others use these charts to confirm signals provided by traditional charts in an effort to avoid false breakouts.
The key to point-and-figure charting is the box size, or the amount of price movement that determines whether a new X or O is added to the chart.
For example, say the box size is $3.
If the last X happened at a price of $15, a new one is added to the current column of X’s when the price rises to $18.
Notably, the line of X’s continues in the same column, provided that the price continues to rise and doesn’t breach a predetermined reversal amount, at which point, a new column of O’s begins.
The same is true for a column of O’s in a declining market; the column continues until the stock reaches the reversal amount, at which point a new column of X’s begins.
A reversal occurs when the price is no longer moving enough to put another X or O in the current X or O column, and then the price moves at least three box sizes (if this is the chosen reversal amount) in the opposite direction.
When a reversal occurs, several X’s or O’s will be drawn at the same time.
For example, following a price rise or column of X’s, if a reversal occurs and the reversal amount is three box sizes, when the reversal occurs three O’s will be drawn starting one spot below the highest X.
Traders utilize P&F charts in similar ways to other charts.
Traders still watch for support and resistance levels.
Breakouts can signal major trend changes.
Depending on the box size, the columns themselves can represent significant trends, and when the column changes (from O to X, or X to O) that may signal a significant trend reversal or pullback.
Now that we have had a look at how to construct a P&F chart, the next question is how do we read it.
It is clearly understood by P&F experts that the law of supply and demand determines the price of the stock.
If the issue is rising in price and we have an uptrend in place with at least three X’s, we believe that demand has overcome supply.
The reverse, when that chart gives us three O’s, indicates supply has overcome demand.
P&F charts show us the establishment of trends, trend reversals, and the supply and demand of charted issues.
Here are some examples:
As you can see in this image above, the X are matching up in a horizontal line.
So they are providing a resistance level to the current price.
The P & F chart makes this very clear and makes it even more obvious when the price breaks this resistance level by filling another X above the resistance level.
See how the Os are lined up in this picture?
That’s the support level.
The P & F chart makes this very clear and makes it even more obvious when the price breaks this support level by filling another O below the support level.
These examples are in their simplest form, but help illustrate the point.
When to Use a Point and Figure Chart
Point-and-figure charts are typically used to identify reversal patterns.
When a trend reverses, point and figure charting can show the stock’s potential for decline or increased volatility in price movement.
Below is a quick example of a strategy you could use:
Reversal Trading Strategies: Point & Figure Charts
A trader could use the following strategies with P&F charts:
- Buy at the breakout and hold until a reversal pattern emerges
- Sell when three X’s or O’s appear in one column, depending on whether you are bullish or bearish. When this happens, it indicates that supply has overcome demand for at least three consecutive days of trading.
- Short sell when an uptrend is reversed by two successive columns each of three O’s
- Sell when the price of a stock breaches its reversal level. You can use either an upside or downside box size, depending on whether you are bullish or bearish. This is typically done in conjunction with traditional candlestick charts.
Where To Use Point and Figure Charts
Below is a list of resources that have point and figure charts as a setting for free.
You can use these websites to get a better understanding and practise the P&F charts.
Check them out:
Before You Convert, Here Are Some Disadvantages:
P&F charts can be slow to react to price changes.
A breakout, for example, must move the box amount in order to signal a breakout occurred.
This may benefit some traders as it may reduce false breakout signals, but the price has already moved the box amount (or more) beyond the breakout point.
For some traders, getting the signal after the price has already moved that much may not be effective.
Also, while P&F charts may help reduce the number of false breakouts, false breakouts still occur.
What appears to be a breakout may still be reversed a short time later.
P&F charts are good at keeping traders in strong trends, as a lot of small counter-trend movements are filtered out.
Yet when a reversal occurs it can significantly erase profits or result in big losses.
Because the reversal amount is typically so large, if a trader is only using P&F charts they won’t see the reversal until the price has moved significantly against them.
One advantage point and figure charts have over other types of analysis, like candlesticks or trendlines, is their ability to filter out small counter-trend movements.
This makes them good for strong trends but susceptible when the price reverses against an established pattern in large amounts.
The key with point and figures is being able to spot these changes before they happen so you can take appropriate action – this may not always be possible given how slow P&F charts react as well as false breakouts which still occur even with P&F analysis.
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