How to Use Point and Figure Charts: A Unique Approach to Price Analysis

Introduction

Point and Figure (P&F) charts are a technical analysis tool that focuses on price movement rather than time. Unlike traditional candlestick or bar charts, P&F charts filter out market noise by tracking only significant price changes, making them useful for identifying trends, breakouts, and support/resistance levels.

What is a Point and Figure Chart?

A Point and Figure (P&F) chart consists of columns of X’s and O’s:

• X Columns represent rising prices (bullish movements).
• O Columns represent falling prices (bearish movements).
• Changes between X and O columns occur only when the price reverses by a pre-defined amount (known as the box size).

How to Read a Point and Figure Chart

1. Determine the Box Size:
   • The box size defines the minimum price movement required to plot a new X or O.
   • Example: If the box size is $1, the price must move at least $1 to add an X or O.
2. Choose the Reversal Amount:
   • A new column is started when the price reverses by a set number of boxes (typically 3-box reversal).
   • Example: If the box size is $1 and the reversal is 3 boxes, the price must move at least $3 to switch from X to O (or vice versa).
3. Identify Trendlines:
   • Uptrends consist of rising X columns.
   • Downtrends consist of falling O columns.
   • Breakouts occur when price crosses a resistance or support level.

Trading Strategies Using Point and Figure Charts

1. Support and Resistance Strategy

• Identify key support and resistance levels on the P&F chart.
• Buy when price breaks above resistance (bullish breakout).
• Sell when price breaks below support (bearish breakdown).

2. Trendline Breakout Strategy

• Draw a bullish trendline connecting rising X columns.
• Draw a bearish trendline connecting falling O columns.
• Trade the breakout direction when price crosses these trendlines.

3. P&F with Moving Averages

• Use Point and Figure charts alongside moving averages for confirmation.
• A breakout above a long-term moving average signals strong bullish momentum.
• A breakdown below a moving average confirms a bearish move.

Example of a P&F Trade

• A stock forms a triple-top breakout (strong resistance level cleared by X column).
• The trader enters a long position when price breaks above resistance.
• Price continues rising, confirming bullish momentum.

Advantages of Using Point and Figure Charts

1. Removes Market Noise: Focuses on price action rather than time.
2. Identifies Clear Trends: Easy to spot support, resistance, and breakouts.
3. Works in All Markets: Useful for stocks, forex, commodities, and crypto trading.

Limitations

• Lagging Indicator: Requires significant price movement to confirm a trend.
• Less Commonly Used: Not as widely available on all trading platforms.

Conclusion

Point and Figure charts provide a clear and simplified way to analyze price trends and breakouts. By focusing on price movements and filtering out small fluctuations, P&F charts help traders identify high-probability trade setups.