Point & Figure Chart

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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

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