Understanding Point & Figure Charts
Point & Figure charts consist of columns of X's and O's that represent filtered price movements over time. Their distinctive look may be alien at first to people who are more familiar with traditional price bar charts but once people learn the basics of P&F charts they usually become hooked.
There are several advantages to using P&F charts instead of the more traditional bar or candlestick charts. P&F charts automatically
Eliminate the insignificant price movements that often make bar charts appear 'noisy,'
Remove the often misleading effects of time from the analysis process,
Make recognizing support/resistance levels much easier,
Make trend line recognition a 'no-brainer',
Help you stay focused on the important long-term price developments,
After briefly discussing the history of P&F charting, we'll talk about how to construct a P&F chart by hand. Then we'll discuss how to interpret the most common P&F chart formations.
History
Point & Figure chart analysis has been popular for a very long time. Part of its original appeal was that it was very simple for someone to maintain a large collection of P&F charts back in the days before computers. In less than an hour, using just a pencil, a newspaper and some graph paper, P&F chartists were able to update and analyze 50 or more charts every day. When computers arrived, they made it much easier to create bar charts and P&F charts started to fade in popularity. Recently however, as investors look for better ways to select stocks, Point & Figure charting has been 'rediscovered' and is once again growing in popularity.
This classic paper and pencil-based method was largely put aside as technology made charting easier, and charts became flashier. Now StockCharts.com has reintroduced the Point & Figure chart, adding a dynamic interface that gives you control of the variables.
Creating a P&F Chart
On a P&F chart price movements are combined into either a rising column of X's or a falling column of O's. If you are familiar with standard chart analysis, you can think of each column as representing either an uptrend or a downtrend. Each X or O occupies what is called a box on the chart. Each chart has a setting called the Box Size that is the amount that a stock needs to move above the top of the current column of X's (or below the bottom of the current column of O's) before another X (or O) is added to that column. Each chart has a second setting called the Reversal Amount that determines the amount that a stock needs to move in the opposite direction (down if we are in a rising column of X's, up for a column of O's) before a reversal occurs. Whenever this reversal threshold is crossed, a new column is started right next to the previous one, only moving in the opposite direction.
In a nutshell, as long as a stock is in an uptrend and it doesn't move down more than the 'reversal distance' (i.e., the box size multiplied by the reversal amount), the P&F chart will show a growing column of X's. Similarly, a stock in a downtrend will cause a descending column of O's to appear. Only when the stock changes direction by more than the reversal distance will a new column be added to the chart.
Traditionally, the box size is set to 1 and the reversal amount is 3... It is important to remember that a P&F Box does not represent a single value. Instead, it represents a range of values that is equal to the box size. The number on the vertical axis represents the value of the "floor" of the box. The "ceiling" of the box is equal to the floor + the box size. If prices move anywhere inside that range of values, the box is filled in with an "X" or and "O"
Constructing a P&F Chart by Hand
The best way to really understand P&F charts is to create one by hand. All you need is a grid (graph paper is perfect), a pencil, and stock quotes. Only high and low prices are charted - the open and close are ignored.
Simple P&F Chart Patterns
At the most basic level, there are four things to look for:
Support levels
Resistance levels
Upward trend lines
Downward trend lines
Support and resistance are defined in more detail in our glossary. Because of the nature of P&F charts, support and resistance levels are always horizontal lines and trend lines always appear at 45° angles.
Support Levels
Support levels indicate the price at which most investors feel that prices will move higher. There is sufficient demand for a stock to cause a halt in an downward trend and turn the trend up. You can spot support levels on P&F charts by looking for a horizontal row of Os that each mark the bottom of their respective columns.
20
19
18 X X
17 X X O X O
16 X O X O X O
15 O X X O X O X O X
14 O X O X O O X O X O
13 O X O X O O X O X O
12 O X O O X O X O
11 O X O O O
10 O + + + + + Support Level
When a support level is penetrated (the price drops below the support level) it often becomes a resistance level; this is because investors want to limit their losses and will sell later, when prices approach the former level.
Resistance Levels
Like support levels, resistance levels are horizontal lines on P&F charts. They mark the upper level for trading, or a price at which sellers typically outnumber buyers. Find them by looking for a row of X's.
20
19 + + + + + + + Resistance level
18 X X
17 X X O X O
16 X O X O X O
15 O X X O X O X O X
14 O X O X O O X O X O
13 O X O X O O X O X O
12 O X O O X O X O
11 O X O O O
10 O
When resistance levels are broken, the price moves above the resistance level, and often does so decisively.
Upward Trend Lines
To plot an upward, or support, trend line, first put a + under the first column of Os.
20
19
18 X X
17 X X O X O
16 X O X O X O
15 O X X O X O X O X
14 O X O X O O X O X O X
13 O X O X O O X O X O
12 O X O O X O X O
11 O X O O O
10 O
+
Then move over one box and up one box and draw another +. Repeat this until you hit another column of Os followed by a row of X's which does not continue the pattern.
20
19
18 X X
17 X X O X O
16 X O X O X O
15 O X X O X O X O X
14 O X O X O + O X O X O X
13 O X O X + O O X O X O
12 O X O + O X O X O
11 O X + O O O
10 O +
+ Upward Trend Line
The upward trend line indicates the point where buyers start to outnumber sellers.
Downward Trend Lines
Now our stock has turned a corner. Let's look for a downward trend line. Start at a wall of X's, and use the same plotting technique as before, but at a downward angle. Remember, trend lines always appear at a 45° angle.
20
19 +
18 X X + Downward Trend Line
17 X X O X O +
16 X O X O X O +
15 O X X O X O X O X +
14 O X O X O O X O X O +
13 O X O X O O X O X O
12 O X O O X O X O
11 O X O O O
10 O
Confirmation
Both support levels and resistance levels should be confirmed by volume. If volume increases after a breakout, most people agree with the new direction.
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