45 degree trend lines
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.
History
The technique is over 100 years old. "Hoyle" was the first to write about it and showed charts in his 1898 book, The Game in Wall Street.[1] The first book/manual dedicated to Point and Figure was written by Victor Devilliers in 1933. Chartcraft Inc, in the USA, popularized the system in the 1940s. Cohen founded Chartcraft and wrote on point and figure charting in 1947. Chartcraft published further pioneering books on P&F charting, namely those by Burke, Aby and Zieg. Chartcraft Inc is still running today, providing daily point and figure services for the US market under the name of Investors Intelligence. Veteran Mike Burke still works for Chartcraft, having started back in 1962 under the guidance of Cohen. Burke went on to train other point and figure gurus, such as Thomas Dorsey who would go on to write authoritative texts on the subject.
A detailed history can be found in Jeremy du Plessis’ ‘The Definitive Guide to Point and Figure’ where many references and examples are cited.
Du Plessis describes their development from a price recording system to a charting method. Traders kept track of prices by writing them down in columns. They noticed patterns in their price record and started referring to them first as ‘fluctuation charts’ and then as ‘figure charts’. They started using Xs instead of numbers and these charts became known as ‘point charts’. Traders used both point charts and figure charts together and referred to them as their point and figure charts, which is where Du Plessis suggests the name point and figure came from. Modern point and figure charts are drawn with Xs and Os where columns of Xs are rising prices and columns of Os are falling prices, although many traditionalists such as David Fuller and Louise Yamada still use the Xs only point method of plotting.
Advantages of point and figure
Point and Figure charts are based on price action, not time. If there are no significant price moves, nothing changes. Proponents[who?] argue that this difference makes finding patterns and trends in P&F charts easier than other charts because it filters out unnecessary data.
The balance between buyers and sellers
P&F charts map out the relationship between supply (created by sellers) and demand (created by buyers) at different price levels.
- When demand outstrips supply (more buyers than sellers), stock prices rise and this is depicted by a column of Xs on the chart.
- Conversely, when supply outstrips demand, (more sellers than buyers) prices fall and this is depicted by a column of Os on the chart.
The objective of a p&f chart is to identify the points at which established supply/demand relationships change (these are known as “breakouts”). These changes will very probably lead to a future significant move in the stock price.
Using Point & Figure Charts
Point and figure (p&f) charts provide a simple, yet disciplined method of identifying current or emerging trends in stock prices. This brief guide aims to familiarise the investor with the basic concepts behind p&f charts and highlights some of the benefits from using them in one’s investment procedure.
The balance between buyers and sellers
P&F charts map out the relationship between supply (created by sellers) and demand (created by buyers) at different price levels.
- When demand outstrips supply (more buyers than sellers), stock prices rise and this is depicted by a column of Xs on the chart.
- Conversely, when supply outstrips demand, (more sellers than buyers) prices fall and this is depicted by a column of Os on the chart.
The objective of a p&f chart is to identify the points at which established supply/demand relationships change (these are known as “breakouts”). These changes will very probably lead to a future significant move in the stock price.
What makes p&f charts so different?
There is no doubt that point & figure charts look very different from the now more common chart formats such as bar charts but with a little effort one quickly appreciates their simple yet effective approach – “point & figure charts shout where other charts merely stutter”. Notable features are as follows:
- No time axis - unlike bar or candlestick charts, p&f charts have no horizontal time axis – only price change generates chart action.
- The 3 Box reversal rule - P&F charts will not change direction (i.e. from a column of Xs to a column of Os) unless the price moves more than 3 ‘boxes’ (or unit of price) in the opposite direction. There can therefore be no fewer than three boxes in a column. This reversal technique is one of the key strengths to p&f charting as it effectively filters out minor fluctuations to reveal patterns.
- Semi log scale - the Y axis scale on a p&f chart is graduated to allow one to view and compare similar signals for different prices stocks.
- Clear cut signals – what makes p&f charts so popular is the clarity of signal: each stock is either on a buy or on a sell and identifying when this signal changes is well-defined and easy to spot.
- Support/resistance levels easy to identify due to the almost diagrammatic box format.
- Stop and target levels are calculated for every breakout signal
Semi Logarithmic Scales
Stock charts use a semi-logarithmic scale so that price formations remain appropriate at different levels.
The classic scale is as follows:
Up to 50-100 0.25 per box
200 AND ABOVE 0.50 per box
400-1000 1.00 per box
1000 upwards 2.00 per box
We have recently introduced the new extended semi-log scale which provides a more sensitive scale for low priced stocks and also handles high priced indices more appropriately.
RS 5 0.10 per box
-5 - 10 0.20 per box
10-20 0.50 per box
20-100 1.00 per box
100-200 2.00 per box
100-200 2.00 per box
200-500 5.00 per box
500-1000 10.00 per box
2000-5000 50.00 per box
P&F Support and Resistance Levels
Whilst we are fully acknowledge the warning ‘past performance is no guarantee of future performance’ support and resis
Support levels are identified as a horizontal row of Os which represents a level at which demand overcomes supply i.e. where buyers feel confident to step in.
|
O
O X
O X X X
O X O X O X
O X O X O X
O O O
Support |
Resistance levels are identified as a horizontal row of Xs which represents a level at which supply overcomes demand i.e. where sellers feel confident to step in.
|
Resistance
X X X X
X O X O X O X O
X O X O X O X O
X O O O X O
X O O
O
|
Determining Price Objectives
There are several methods for determining the price objective on a point & figure chart, the most popular is the vertical count method. This is a mathematical calculation applied to all new p&f signals that provides a good ball-park figure of what could be achieved from that signal. A quick risk reward ratio of any buy signal can be calculated by comparing the price objective to the stop loss level (below the prior down column for a p&f buy).
We would also suggest studying areas of overhead resistance and looking for the bearish resistance line when considering the likely upside potential for a stock.
Calculations for a buy signal
To determine the vertical count for a buy signal, count the number of Xs to the right of the low point, multiply by the box size and multiply by 3.
For example, in the example opposite, the stock generated a triple top buy at $56 but the low point was the first column of Os down to RS50.
We therefore count the column of Xs next to this column i.e. 5 boxes multiplied by the box size (RS1) multiplied by 3 = RS15
To get the price objective, we add $15 to the low point i.e.
50 + 15 = 65
|
56 O X
55 O X X X
54 O X O X O X
53 O X O X O X
52 O X O O
51 O X
50 O
|
Calculations for a sell signal
To determine the vertical count for a sell signal, count the number of Os to the right of the high point, multiply by the box size and multiply by 3.
For example, 4 boxes in down column to the right of the high point at RS 56, multiplied by the box size (RS1), multiplied by 3 = RS12.
Price objective subtract RS12 from high point RS56 = RS 44.
|
56 X
55 X X O X
54 X O X O X O
53 X O X O X O
52 X O O O
51 X O
50 X
|
A few P&F concepts to know
Box size is one of the key determinations to be made when constructing your chart. In P&F charting, box size determines the sensitivity and frequency of trading signals. In our previous example, recall how a RS1 increase in the stock would have resulted in one new X mark on a 1-box chart, but not on a 5-box chart.
Reversal size is another key component of a P&F chart. This is the number of boxes by which the price must move before a reversal and the beginning of a new column to the right. For example, on a 3-box reversal chart in a column of Xs, the price would need to move at least three boxes lower before you could begin a new column of Os. Alternatively, in a column of Os, you would need to move at least three boxes higher before you could plot a new column of Xs. There are no price reversals below some predetermined, minimum value.
Box size and reversal size may be stated on the chart. For example, a 5 x 3 chart stands for a 5-box size and 3-box reversal. This translates to a box size of 5 (where each X or O represents a five-point move) and at least 3 boxes must be plotted in each column before a reversal and a new column is begun. Consequently, a 5 x 3 chart would require a 15-point move (5 x 3) in the security price for a reversal to take place. Similarly, a 1 x 1 chart would require just a 1-point move in the opposite direction for a reversal to take place.
Choose box and reversal size carefully
There are a few ways to manage a P&F chart, depending on your strategy. Sensitivity, or how frequently you’d like to generate trading signals, is dependent on your box and reversal size choices. If you are looking for frequent trading signals (e.g., an intraday trading strategy), a smaller box and reversal size might be appropriate. To increase the sensitivity of a 5 x 3 chart, for example, you could decrease the box size to 3 x 1.
A 1 x 1 chart would be the smallest and most sensitive chart that can be constructed. The main advantage of a 1-box reversal chart is obtaining price objectives using a horizontal count. We’ll cover price targets shortly.
Box and reversal size will also play a significant role in how a chart looks, and, potentially, in the validity of patterns. Breakouts from bigger congestion zones are more significant compared with a breakout from a less congested area, and wider patterns generally produce stronger breakout signals.
A note about box size.
Typically, box size (and reversals) can change at extreme price ends. Consider a stock that is trading at RS 50. While a 1-box chart might designate a RS 1 move for each new box, box size values can be set differently when the stock rises above RS100 or falls below RS 20 (i.e., one new box might be plotted for each RS 0.50 move between RS 5 and RS20).
What to look for
A note about price targets.
Identifying the pattern and determining where to base your count requires some experience using P&F analysis. Frequently, a column in a congestion zone, recent column, or first column is used.
Once you get used to how these charts look, it’s possible to apply many traditional technical analysis techniques. Head and shoulders patterns, moving averages, and fulcrums, for example, are found in P&F charts. A few other techniques are exclusive to simplified box P&F charts, including trend lines that may be drawn at a 45-degree angle on 3-box charts. P&F charts can be useful for identifying support and resistance levels, breakouts, and price targets.
“There are three primary things to look for when evaluating a point and figure chart," says David Keller, CMT, president of the Market Technicians Association and managing director of technical research at Fidelity. "They are the trend, the trend lines, and the price targets.”
How to identify price targets using a P&F chart
The count method is a way to determine price targets on P&F charts. This is a means of anticipating the expected price move using the length of the pattern, reversal size, and a point on the chart.
To determine price targets, there are two basic methods: horizontal and vertical counts.
- Horizontal count method: According to Jeremy Du Plessis, author of “The Definitive Guide to Point and Figure,” one way to determine a price target is to count the number of columns in the pattern (see the note, above right). Then multiply the number of columns by the reversal box size, and add that number to (or subtract from for a downtrend) the price of the lowest O (or the highest X for a downtrend) in the pattern. Suppose that the width of the pattern is 7 columns, the reversal box size is 3, and the lowest O in the pattern is RS20. The horizontal price target would then be 41 ([7 x 3] + 20).
- Vertical count method calculation: Instead of counting the columns in the pattern, count the number of boxes in the predetermined column for the vertical count method. Then, multiply the number of boxes by the reversal box size, and add that number to (or subtract from for a downtrend pattern) the price of the bottom box (or the top box for a downtrend) of the column that is to the left of the column with the most boxes. Suppose that the number of boxes in the column is 10, the reversal box size is 3, and the bottom box of an O column that is next to the chosen X column is RS20. The horizontal price target would then be 50 ([10 x 3] + 20).
These methods generate specific price targets; however, that does not mean the price will certainly rise or fall to the target. Price targets can be useful for identifying the general direction and range that a security might go. For instance, if after a short uptrend the price begins to decline, the price at which the trend might change to neutral is right below the base of the beginning of the short uptrend. A price target can narrow the range as to where the security might then reach.
Applying point & figure
P&F chart trend lines suggest bullish momentum
In terms of current P&F application, Keller notes that that “on a 10-point point and figure chart of the S&P 500, we had a bullish signal in July when the index broke above 1,660 for a double top breakout.” Indeed, the market rallied throughout July into early August.
Keller thinks the longer-term bullish trend may persist. “The S&P is well above the 45-degree trend line from the October 2012 low, and is also above the secondary trend line from the June 2013 low. In terms of a price objective, a vertical count using the last two significant uptrends suggests a minimum upside target of 1,960.” Keller adds that as long as the S&P stays above 1,640, this trend could remain in place.
P&F is another tool in the toolbox
To be sure, P&F charts are not for everyone as this type of analysis requires some getting used to. There are some drawbacks as well. For instance, volume is not considered, and P&F charts are not good for identifying whether a stock is being accumulated (bought) or distributed (sold).
However, if you’d like to execute a unique type of technical analysis, you can use P&F charts to generate buy and sell signals and identify price targets.
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