Point & Figure Charts
Well, we always pride ourselves on bringing you some of the best articles on day trading but this is a special article. It is special because Point & Figure charting is really close to home as I have been drawing P&F chart by hand for some years.
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:
Now, let's look at a typical example (Broken Hill). The point
size for these values is 20 cents.
The data previous to this showed an upward trend and constituted a series of Xs 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 Os 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 Xs are placed in the $14.20, $14.40 and $14.60 rows. No more Xs are added to this column because the share performs another three point reversal on the 25/02/98 and three Os are place in the appropriate points in the next column. The chart should now look like the this (first column of chart incomplete):
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 Xs and Os 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 Os, the Os 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.
When to Buy and Sell
When analysing the charts to determine the best time to buy and sell shares, the following criteria must be evaluated:
Double Top and Double Bottom Formation
Double Top and Double Bottom formations are the most basic of chart patterns. A Double Top is formed when a high is followed by a decline, which is then followed by a rise that exceeds the previous. A Double Bottom is formed in a similar fashion. As we will see later, most other formations are variations on this simple pattern. Generally, formations that consist of more than 3 vertical columns yield better results.
The Triple Top and Triple
This pattern occurs when a series of 2 or more tops or bottoms is penetrated. Generally this is formed by 5 vertical columns, however it is possible for formation to be spread over multiple columns as shown below:
Bullish and Bearish Triangle Formations
Both triangle formations consist of higher bottoms and lower tops, generally with all prices contained between the bullish support and bearish resistance lines. The signals for the triangle formations are the first Double Top or Double Bottom signals.
The Bullish and Bearish Signal Formation
The significant feature of a bullish signal formation is a higher bottom followed by a higher top. This often indicates that demand has overcome supply. Consequently a lower top followed by a lower bottom forms a bearish signal formation. This often indicates that supply has overcome demand.
Bullish and Bearish Catapult Formations
A Bullish Catapult Formation consists of a Triple Top Buy Signal, a pullback that produces no bearish signal, followed by a new double top buy. This formation has three distinct buy points: (i) the Triple Top Buy Signal, (ii) the bottom of the pullback (with a stop a bearish signal if it should occur), (iii) the Double Top Buy Signal. A Bearish Catapult Formation is the reverse situation.
Long Tail Down
Long Tail Down
A Long Tail Down must have at least twenty Os down. A buy signal is given whenever there is a 3 box upside reversal. A stop-loss can be placed where a double bottom sell signal may occur.
High and Low Pole Formations
A High Pole begins with at least 3 Xs above a previous top. The formation is completed when there is a reversing column of Os that is at least 50% as long as the column of Xs. This warns of a topping process. The Low Pole is the reverse situation.
For more information on Point & Figure patterns see Point & Figure ReferencesReferences.
The next important issue is whether or not the buy and sell signals are in agreement with the basic trend of the stock. This can be assessed via trend lines. Trend lines can be drawn in Bulls-Eye Broker by clicking on the starting point and dragging the mouse to the desired end point.
The Bullish Support Line
A bullish support line is drawn from the lowest point on completion of a significant downtrend and is extended up at a 45-degree angle as far right as possible. This line is predictive because it can be drawn as soon as the market has completed its downtrend. This line does not connect points as trend lines often do. An example of a Bullish Support Line is shown below:
Having drawn this, the theory is quite simple. Any sell signals given above this line should be disregarded. This means the share should not be sold until the first sell signal after the bullish support line has been penetrated.
The Bearish Resistance Line
The bearish resistance line is a very similar concept to the bullish support line. It is drawn from the highest point on completion of a significant uptrend and is extended downwards at an angle of 45 degrees as far right as possible. An example of a bearish resistance line is shown below:
Any buy signals given below this line should be disregarded. This means the share should not be purchased until the first buy signal given after penetration of the bearish resistance line.
Before buying and selling shares, it is necessary to assess 2 market indicators:
Shares should only be purchased when the market as a whole is bullish. Similarly, shares must be selected from industry groups that are bullish and acting better than the rest of the market.
There are two ways to project price: vertical and horizontal
Buy Assuming a 3-box reversal, count the number of
Xs in the first move up that produces a buy signal. Multiply
this number by 3 and add the product to the lowest X in the
column on the right. Sell Reverse for a sell signal.
Bullish Vertical Count
5 X's up
4 O's down
Buy Assuming a 3-box reversal, count the number of boxes across the base of the formation that has given a buy signal. Multiply that number by 3 and add it to the price associated with the lowest X. Sell Reverse for a sell signal.
Bullish Horizontal Count
4 boxes across
3 boxes across
Below are some useful guidelines to consider when buying stocks (reverse for selling stocks):
To find our more about P&F charting and receive a free trial on Stephens software: go to www.archeranalysis.com
Point & Figure Charts
Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice. For further information please read our disclaimer.
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