Point and Figure Chart

What

Point and figure is a charting technique used in technical analysis, a form of heterodox economics used to attempt to predict financial market prices. Point and figure charting is unique in that it does not plot price against time as all other techniques do. Instead in plots price against changes in direction by plotting a column of Xs as the price rises and a column of Os as the price falls.

How

The charts are constructed by deciding on the value represented by each X and O. Any price change below this value is ignored so point and figure acts as a filter to filter out the smaller price changes. The charts change column when the price changes direction by the value of a certain number of Xs or Os. Traditionally this was one and is called a 1 box reversal chart. More common is three called a 3 box reversal chart.

The two variables are:

• Box Size
  • This is the amount a share price has to move before an 'X' is added on top of a column, and conversely before an 'O' is added below a column. The Box Size is dependent on the share price.
• Reversal Amount
  • The Reversal Amount is the pre-determined amount the share price must reverse before the commencement of a new column. The Reversal Amount is usually 3 times the Box Size.

When

The Point & Figure chart is used to filter out non-significant price movements, and enables the trader to easily determine critical support and resistance levels. Traders will place orders when the price moves beyond identified support/resistance levels, because point and figure charts are plotted on squared paper, 45 degree lines may be used to define up trends and down trends from important highs and lows on the chart allowing objective analysis of trends.

Also in common usage is two methods of obtaining price targets from point and figure charts. The vertical method measures the length of the thrust off a high or low and projects the thrust to obtain a target. The horizontal method measures the width of a congestion pattern and uses that to obtain a target.