What is a Point and Figure (P&F) Chart?
A Point and Figure (P&F) chart is made up of multiple columns of X’s, that represent an increase in stock price, and O’s that represent a decrease in stock price. A column of X’s is always followed by a column of O’s and vice-versa. The Chart is composed of multiple boxes, each box is equal to a certain price value range, and the box is filled with a X if the price increases to that range, or with an O if the prices decrease to that range.
P&F charts are regarded as ‘timeless’, as time is not a factor. The charts are a result of price movements, therefore, if prices are static than the chart is left unaltered. The chart is a useful tool in technical analysis, as it helps visualize resistance and support levels for a stocks price.
The most popular P&F charting method is the 3-box reversal method. With this type of P&F chart, the filtering process occurs when a minimum of 3 boxes are used to reverse the present column and start a new one in the opposite direction.
The image below shows a simple example of a P&F chart:
Benefits of P&F Charts
While a P&F chart is one-dimensional in that it is focused only on significant price changes, it can offer several benefits to traders and analysts. The benefits include:
- Filtering out the unnecessary market noise
- Visualization of support and resistance lines
- It is a timeless tool for price movement analysis
- Directing focus to significant price movements
Creating a P&F Chart
Prices on a P&F chart are characterized by rising columns of X’s and falling columns of O’s. Every X and O sits in a box. The box represents a predetermined price range and the larger the box size the fewer X and O on your P&F Chart.
Every chart also has a predetermined reversal amount, which dictates how much a security’s price needs to move in the opposing direction to warrant that the column reverses direction. When the reversal amount is reached, a new column begins next to the previous one, except that it moves in the opposite direction and is represented by the opposite character, i.e., if an O column reverses, a new X column is started, and vice versa.
The amount that a column must reach in order to reverse – its reversal distance – is the product of the reversal amount and the box size. For example, if the box size is 2 and the reversal amount is 4, an 8-point price move would be required for the column to be reversed. As long as the price of a security does not move more than the established reversal distance, the existing column continues.
There are several different ways to establish box scaling or size, however, the most traditionally-used method involves a predefined table of price ranges to dictate what the box’s size should be. The table below shows the traditionally-used table of price ranges and box sizes.
|Price Range||Box Size|
|0.25 to 1.00||0.125|
|1.00 to 5.00||0.25|
|5.00 to 20.00||0.5|
|20.00 to 100||1|
|100 to 200||2|
|200 to 500||4|
|500 to 1,000||5|
|1,000 to 25,000||50|
|25,000 and up||500|
Bar and Candlestick Charts
There are alternatives to P&F charts, most notably bar charts and candlestick charts.
A bar chart is plotted using an x-axis and y-axis and rectangular bars to represent the values of whatever is being studied or compared. A bar chart, unlike a P&F chart, is two-dimensional; the height and width of each bar are established by the factors set within each category – what the x- and y-axes are used to represent. In most cases, either the x- or y-axis represents some form of time – something that the P&F chart does not consider. Bar charts are particularly visual and useful in helping to make comparisons between data sets.
Candlestick charts incorporate aspects of both bar charts and line charts. The charts are used to express price movements. Each candlestick on a chart is used to represent one time period, with each bar showing four vital pieces of information for traders: the opening price, the high for the time period, the low, and the closing price. Because candlestick charts tend to be densely packed with information, they are generally used to show trading patterns that occur over shorter periods of time. Again, time becomes an integral part of this type of chart, which differs from P&F charts.
While sometimes considered an archaic form of charting price movements, point and figure charts can be incredibly useful to traders looking to keep things simple. As long as time considerations aren’t an issue, traders can get a great deal of streamlined information from a P&F chart.
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