Designed for long-term investment, point and figure (PF) charts have been described as one of the simplest systems for better determining solid entry and exit points in stock market trading. The system monitors supply and demand of each issue while keeping a keen eye on developing trends. While point and figure charting has never been on the top of the list of popular techniques used by technical analysts, there is a growing interest in PF from all corners of the charting community. Here we take a close look at PFs and how to read and construct them.
Constructing PF Charts
All the charts that you have studied at Technical Analysis 101 show you the conventional open-close/high-low chart from Tradestation. In the creation of PF, the emphasis is only on the closing price of an issue. The developers of PF charting were interested in trend development and thus were concerned not with the "noise" created daily by minor moves up or down, but with the larger picture and how that plays out in the areas of supply and demand.
The key to PF charts is the establishment of the "unit of price," which is the unit measurement of a price movement that is plotted on the graph. On PV charts, there is no time axis, only a price axis. Rising stock prices are shown with X's and falling prices are shown with O's. These points appear on the chart only if the price moved at least one "unit of price" in either direction. So say the closing prices of a stock moved up one price-unit three times. This would appear as a column of three X's. If the price movement reverses direction, the chart shows a new column of O's, wherein an O is plotted for each unit of price movement. X's and O's never appear in the same column. The chartist, however, must establish how many price units make up a "box," which is how much the price must move in the opposite direction for the chart to begin a new column. Let's say, for an example, the stock you were tracking was trading at the $25.00 level and you were using a $1.00 unit measurement and a reversal box is three units.
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Now, if the stock had been trading upward to the $25.00 level, the stock would have to close at the $22.00 level before the chart would reverse to a column of O's. Because each unit of price movement must be plotted, each unit of price movement down from the $25.00 level must, in this new column of O's, be represented by one O. The next reversal would have the stock trading up at least $3.00 or three points before a new column of X's came back into view on our point and figure chart. Therefore, in our example, assume the issue continues to fall to the $20.00 level before reversing itself; the X's would reappear once the price hits the $23.00 mark. Remember, you choose the unit size. It could be $0.50, $1.00, or even $2.00 if the stock price is high enough. Graphically, the first two columns of our example would look like this:
$25.00 X
$24.00 XO
$23.00 XO
$22.00 XO
$21.00 X
Reading PF Charts
Now that we have had a look at how to construct a PF chart, the next question is how do we read it. It is clearly understood by PF experts that the law of supply and demand determines the price of the stock. If the issue is rising in price and we have an uptrend in place with at least three X's, we believe that demand has overcome supply. The reverse, when that chart gives us three O's, indicates supply has overcome demand. PF charts show us the establishment of trends, trend reversals, and the supply and demand of charted issues.
I have taken a very good group of examples from the folks at