Point & Figure charting dates back to the turn of the century. It's acts like a filter, showing only "significant" price movements, allowing the analyst to see patterns more readily. The basis for plotting revolves around selecting a box size (the value of a + or o). This is one of the most critical decisions for the analyst. A box that is too small will make the chart too sensitive while one that is too large has the opposite effect. Current price, recent volatility and accepted standards provide the analyst with guidelines for determining the optimum box value.
Plotting is based on well defined rules. Horizontal movement reflects trend changes rather than time. In other words, each column can encompass a different amount of days, weeks or even months.
Preference is given to price movements that continue in the direction of the current column. If the last column of the chart is a down column (o's) then the low of the day is tested first. Price movements are considered "significant" if they exceed previous movements in the trend direction by one box.
The price must reverse direction by an amount equal to three boxes for it to be considered "significant". Traditional charts use "x" to mark up trends and "o" to mark down trends. Our examples use a "+" instead of an "x" but otherwise follows the traditional format.
Point and Figure chart created using Personal Analyst from Trendsetter Software.
Many of the same techniques for interpreting bar charts apply to Point & Figure. Trendlines are more easily identified as are many of the chart patterns. In the example above, we can see a Head & Shoulders pattern forming. The most common point and figure formations are shown in following example with corresponding buy and sell signals identified.
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