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Point & Figure Charts

Point and Figure (P&F) charts provide a simple method to identify current and new trends in stock prices. Buy and sell signals are clearly evident at a glance. By their very nature, they filter out the "noise" inherent in other time-based charts, making every mark significant and allowing investors to focus on price trends, breakouts, and reversals.

P&F Charts highlight price trends as well as support and resistance levels by focusing on price movements with respect to previous highs and lows rather than with respect to time, as most charts do. It filters out non-significant price movements, helping traders focus on trends and trend reversals.

Rising prices are generally plotted as columns of X's and falling prices are plotted as columns of O's, although other symbols can be used. A new column is added when the price trend changes, according to user specified criteria. Thus the columns alternate with each reversal of price. Any single column will contain only X's or only O's, where the X's are showing high demand (more people wanting to buy than sell) and the O's are showing high supply (more people wanting to sell than buy). Only high and low prices are significant, ignoring the open and closing prices.

Only significant prices changes are depicted on the chart. The vertical axis of the chart represents discrete prices. It is helpful to think of each box as a bin of prices. In an uptrend, the box is filled in with an X when a new high is made as the price rises to the price levels within that bin. In a downtrend, the box is filled in with an O when a new low is made as the price falls to the price levels within that bin. No action is taken if the price does not move to a new bin level.

When the price trend reverses, it must reverse by a user specified amount, the reversal amount (generally three box sizes) before a new column is created, using the alternate symbol. A new column is added to the right of the last one and signals a change in the price trend.

As long as price is in an uptrend and it doesn't change direction more than the "reversal distance," the P&F chart will show a growing column of X's. Similarly, prices in a downtrend will display a descending column of O's.

P&F charts do not have a time axis like other charts and they don't show time in a linear fashion. Each column can represent one day, or many days, depending on the price movement. Thus the spacing between months will not be the same from month to month. Numbers and letters inside the chart itself indicate when a new month has begun. Thus the start of April would be signified by the number 4 inside the box when the first mark in April is added. October, November, and December are signified by the letters A, B, and C.

P&F charts help investors to spot buy/sell signals through trendline penetrations and breakout from support or resistance levels. Point and figure charts also provide a quick assessment of the overall price trend and risk of reversal of the trend.

Support levels occur when more than one downtrend has been stopped at a price level. Buyers are viewing this price as a bargain and jump in to take advantage of it, driving the price upward. A support level is visible on a Point & Figure Chart as a horizontal row of O's that marked the bottom of their respective columns. A significant change is marked when price falls below a support level. This often triggers more selling, driving the price further downward. When this happens, the support level often becomes a new resistance level.

Resistance levels occur when more than one uptrend has been stopped at a price level. Buyers are viewing this price as expensive and jump in to take profits, driving the price downward. A resistance level is visible on a Point & Figure Chart as a horizontal row of X's that marked the top of their respective columns. A significant change is marked when price rises above a resistance level. This often triggers more buying, driving the price further upward. When this happens, the resistance level often becomes a new support level.

Breakouts of Support or resistance levels should be confirmed by higher volume after the breakout, otherwise it may be a false breakout that is a trap for investors.




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