Point and figure is a charting technique used in technical analysis, 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 it 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 To Trade P&F 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,
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.
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.
It sounds much more complex than it is, trust me!
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.
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" (keep reading for details).
At the most basic level, there are four things to look for:
* Support levels
* Resistance levels
* Upward trend lines
* Downward trend lines