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
- 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.
- 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).
- 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
- Removes Market Noise: Focuses on price action rather than time.
- Identifies Clear Trends: Easy to spot support, resistance, and breakouts.
- 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.
