How to Read and Use a Point and Figure Chart
Most technical analysts monitor indicators and charts to aid them in forecasting stock price movements. These resources leverage historical patterns and trends in an effort to anticipate future changes to asset prices. Some traders use point-and-figure charts to assess stocks and indexes. The P&F Chart isn’t as straightforward as a line chart. After reviewing the basics in this article, you should better understand how to read and use a point-and-figure chart.
What Is a Point-and-Figure (P&F) Chart
A point-and-figure chart is a stock chart of Xs and Os that is based upon price movement instead of time. Each X represents price growth, while each O represents a decline.
The chart does not reflect changes until the stock’s price moves by enough points to warrant an X or an O. A stock trader creating the chart can decide how much the stock’s price has to move to generate a new X or O). Some traders create P&F charts that add an X or O after every $0.50 change to the stock’s price, while others set it to add an X or O after every $1 change.
Xs and Os are then stacked in columns, and each column can contain only one letter type. If a stock goes up by $2, and the interval is $0.50, the chart would show four Xs on one column. If the same stock then drops by $1.50, the following column would have three Os.
Xs can reverse if they break through a set preset reversal amount. At this point, a new column of Os would begin. In this example, a $1 shift only results in two Os, which is not enough to create a new column as the interval is $0.50, from the above example. Some traders use smaller intervals, such as $0.25, to see more action on the chart, depending on the stock.
Point-and-Figure Chart Patterns
Point-and-figure charts display a series of Xs and Os that visualize price movements, but how can traders interpret this information? Using this chart to look for bullish and bearish patterns can be a guide for future trades.
Bullish Patterns
Double bottom: After declining for a bit, a stock sees some upward momentum. This upward momentum gives way to a string of Xs as a higher high or a string of Os as a lower lows. The Os eventually reach the same level as the previously established low and continue in the breakout’s direction but do not fall below it. This is a double bottom that indicates a bullish support line.
Bullish catapult: A resistance line can be established at a double top, but the stock price may surpass that line. When that happens, a column of Xs tower above the previously established double top. This results in a breakout, also known as a bullish catapult, that typically leads to further upward momentum.
Bearish Patterns
Double top: After reaching a relative high, a string of Xs and Os follows. Once the Xs reach the same level once again, a column of Os emerges. This double top means the stock price struggled twice to break past the high. A line of resistance has been established.
Bearish catapult: A bearish catapult occurs when a stock’s price breaks through a double bottom. A column of Os goes lower than the previous columns of Os that generated the double bottom. This bottom catapult usually indicates additional declines in the near term.
How to Calculate Point-and-Figure Charts
Point-and-figure charts generally do not have calculations. Some stock trading platforms give you access to P&F charts that let you input the box size and reversal amounts. The box size can be any amount, such as $0.50. The reversal amount is how many Xs and Os are required to create a new column. If the box size is $0.50, and you need three Xs or Os to create a reversal, the stock must move up or down by at least $1.50 to generate a reversal.
Analyzing a Point-and-Figure Chart
A point-and-figure chart is not represented in days or weeks. It only contains price changes based on predetermined box sizes. These charts may make it easier to identify support and resistance lines, and they are smaller price fluctuations. Some industry-created P&F charts display the months from January to September as 1-9 respectively, while the letters A, B, and C typically represent October, November, and December respectively. The year is shown on the bottom of the chart.
Many traders use technical analysis to assist in forecasting future trends. A point-and-figure chart can reveal potential support and resistance lines. The way a stock’s price interacts with those lines can determine whether the current trend is bullish or bearish. Traders also monitor changes from Xs to Os and vice-versa in search of a reversal.
Point-and-Figure vs. Renko Charts
Point-and-figure and Renko charts both use vertical columns to illustrate price movements instead of the passage of time for their graphs. While P&F charts use Xs and Os, Renko charts use blocks. Green and white blocks indicate growth, while red and black bricks show a falling stock price. P&F lets you decide how many boxes are necessary for a reversal, while a Renko chart is fixed at two bricks for a reversal. Both tend to work well with chart patterns, but a Renko chart may function more effectively if you also use technical indicators.
Traders may benefit from using P&F and Renko charts in their stock trading strategies. Each chart puts a stronger emphasis on price movements than other charts, which also consider time. It’s generally easier to see big-picture changes instead of small price fluctuations that can become distracting.
Possible Advantages of a P&F Chart
The P&F chart has several potential advantages over other stock charts.
Less clutter: Stock charts that include time can present false signals and distract traders from long-term trends. A P&F chart has less noise.
Find support and resistance lines: P&F charts can make it easier to determine possible support and resistance lines. Instead of letting small price fluctuations influence technical lines, P&F charts look at more pronounced price movements.
Traders can adjust the P&F chart: Traders can decide on the size of each box and how many blocks trigger a reversal. This level of customization can help traders create charts nuanced to their strategies.
Limitations of a P&F Chart
Every stock chart has strengths and weaknesses. Here are some things to keep in mind before using a P&F chart.
Different interpretations: Two traders can look at the same P&F chart differently. Because traders can customize these charts to their liking, they aren’t as uniform as other stock charts.
Harder to detect real-time price movements: A P&F chart does not report price changes right away. A stock’s price has to go up or down by three boxes for a reversal to take place. If each box is $1, the price has to go up or down by $3 to create a new column. Other stock charts can capture real-time price movements and give traders a gauge of what’s happening right now.
Fewer technical indicators: P&F charts rely on support and resistance lines for technical analysis. If you want to use more technical indicators, you may want to select another chart.
Analyzing Market Trends with P&F Charts
P&F charts offer a decluttered trading experience that filters out small price fluctuations so you can focus on the big picture. While a P&F chart can be useful, traders should consider looking at multiple charts and technical indicators. Combining resources can improve a trader’s ability to more accurately forecast stock price movements.
Frequently Asked Questions
Do point-and-figure charts work?
These charts can help traders find potential support and resistance lines. Some traders use them to successfully predict market trends, but no chart is a guarantee.
What are the signals of point-and-figure charts?
A buy signal for this chart type happens when a column of X's exceeds the top of the previous X column, and for a column O’s, this can be represented when the column falls one box below the previous O column.
How do you use point-and-figure charts?
These charts can make it easier to identify technical lines such as double tops and bottoms and possible breakouts.
Note: This presentation discusses technical analysis, other approaches, including fundamental analysis, may offer very different views. The examples provided are for illustrative purposes only and are not intended to be reflective of the results you can expect to achieve.
