Why Point & Figure Charts?

Point & Figure (P&F) charts are one of the simplest and clearest ways to determining the best time to buy and sell shares. The P&F system represents one of the oldest approaches to share market trading. This method takes the technical analysts approach while monitoring supply and demand for each share. And the charts are designed for long-term trading so that the time and cost of trading shares is minimal.

How are Point & Figure Charts Constructed?

In P&F charts both axis are dependent on price rather than one being based on price and the other on date. The key unit in a P&F chart is the point, or unit of price. The point size may change in value along the y-axis to provide consistent and relative price movements. This means that a if a share ranges between $8 and $12, the point size may be 10 cents when the share is below $10 and 20 cents when above. An ‘X’ is placed on the chart to indicate an upward movement and an ‘O’ indicates a downward movement. The graph gets its x-axis dimension via three point reversals. A three-point reversal occurs when either:

1. The price is on a downward trend, then picks up three or more points, or
2. The price is on an upward trend, then falls by three or more points.

When a three-point reversal occurs, the chart is continued in the next column. Thus every column must contain at least 3 ‘O’s or ‘X’s and constitutes movement in one direction only. The attraction of this method is that insignificant movements in the market are filtered out.

Now, let's look at a typical example. The point size for these values is 20 cents.

The data previous to this showed an upward trend and constituted a series of ‘X’s in the column. This column peaks at $15.38 on 10/02/98. The last ‘X’ is drawn in the $15.20 square because the share has not yet reached $15.40. This means that for a three point reversal to occur the price must drop by at least 60 cents, or three points. This happens on 13/02/98 with a low of $14.35. When this occurs the chart is moved to the next column and ‘O’s are placed in the $15.00, $14.80, $14.60 and $14.40 rows. An ‘O’ is not placed in the $14.20 row because the price has not yet reached $14.20. The price does, however, fall to $14.05 on 16/02/98 and another ‘O’ is place in the $14.20 row. The chart falls once again to $13.98 on 17/02/98. When this occurs yet another ‘O’ is added to the chart, this time in the $14.00 row. The very next day the chart rises to $14.62 and this constitutes a three-point reversal. The chart is moved to the next column and ‘X’s are placed in the $14.20, $14.40 and $14.60 rows. No more ‘X’s are added to this column because the share performs another three point reversal on the 25/02/98 and three ‘O’s are place in the appropriate points in the next column. The chart should now look like the this (first column of chart incomplete):
 

Dates are added to the chart by replacing an ‘X’ or an ‘O’ by the month number. When the year changes it is written at the bottom of the chart. You will notice that the year labels can be vary in position as the charts movement is dependent on price and not on date. The suspension of trading on particular shares is shown by a ‘?’ in the charts.

The Wyckoff Method

The Wyckoff method is a special type of point & figure chart. It uses a single box reversal instead of the more common three point reversal. It also varies from the standard point & figure chart because it can contain both X’s and O’s in the same column. This will occur whenever there is only a single entry made in a column. For example if we had a single X in a column followed by 3 O’s, the O’s will be displayed in the same column as the X. In a Wyckoff chart there must always be more than one entry in a column.

References

·         Point and Figure Charting, Second Edition, Thomas J. Dorsey, ISBN 0-471-41292-9

·         Point and Figure Charting, Thomas J. Dorsey, ISBN 0-471-11961-X

·         The Complete Guide to Point and Figure Charting, Carroll D. Aby, Jr.

·         Chart for Profit – Point and Figure, Earl Blumenthal

·         Three-Point Reversal Method of Point and Reversal Construction and Formations, Michael L. Burke

·         Three-Point Reversal Method of Point and Figure Stock Market Trading, A. W. Cohen

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