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Point and figure charting

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Point and figure chart

Point and Figure charts differ from the bar charts in two significant ways. At first, bar charts are constructed on time intervals regardless of whether there is any change in price. A new plot on a Point and Figure chart is made only if the price changes by a certain amount. Point and Figure chart measures only price fluctuations, while bar charts measures both price (on the ordinate axis) and time (on the abscise axis), i.e. the price change through time.

The second important difference is that bar charts record every price change for the chosen period of time, but Point and Figure chart ignores price movements which are smaller than a set volume. For example, if a box is set for 5-point fluctuations, only price changes that excess 5 points will be recorded, while smaller fluctuations will not be recorded.

Construction of Point and Figure charts

Point and Figure charts are plotted using combinations of X’s and O’s. A column of X’s represents a rising market whereas a column of O’s represents fall in price. Once the amount of the analysed data to be constructed has been set, there are two important decisions to be made before a chart can be plotted.

First of all, the size of the box must be determined. For individual stocks, it is a common practice to use a 1-point box for securities trading above $20 and a 1/2-point box for lower-priced securities. However, for long-term charts and for the bigger indices 5-, 10-, 20-point boxes are more appropriate. As the box size decreases, the details of the graphically displayed price movement are increased, and vice versa. Analyzing the stock market data over several years period, it is more convenient to use a relatively large box. In many cases it is good to consider two or three charts with a different box size at the same time.

Secondly, the construction of a regular Point and Figure chart or a reversal chart should be chosen. The regular (straight) chart is plotted when the price fluctuates within a given amount, and, for example, if the price moves form $64 to $65, five X’s will be plotted on a $0.20-point chart, and if the price reverses from $67 to $66, five O’s will be depicted. Reversal charts follow the rule: a new series of X’s and O’s cannot begin until prices have moved by a specified amount in the opposite direction to the prevailing trend. The use of the reversal method helps to reduce misleading or whipsaw signals and to greatly compress the size of the chart.

File:Krestiki_noliki.jpg

Image 1. Point and Figure chart.

The construction of ½-, 5-, 10-point charts is analogous to the previous technique except that a new box can be posted only when the price has moved by the certain values, i.e. by ½, 5, an 10 points respectively. Such fluctuations may occur during several days, weeks or months. As an axis for dates is not provided at the chart, they are recorded below a column or at the respective box. Both methods are used for long-term charts. For example, the years are placed at the bottom of the chart against the column that the first posting of the year was made for, the same with months.

The decision about the box size (and thus the degree of the price change required to trigger a new column of X’s and O’s) is essentially based on the personal judgment and experience. It depends on the price range and the market stability. Boosting the size of the boxes increases the number of the price movement displayed at the chart. Making the box larger expands the base of data that can be included, but limits the number of fluctuations that can be illustrated. Following a market with bar or line charts on a daily, weekly, or monthly basis corresponds to keeping several point and figure charts using various box sizes.

Point and Figure charts are plotted on both an arithmetic and a semilogarithmic scale.

The data published in the financial press about the high, low, and closing prices for specific stocks are not suitable for the accurate plotting of Point and Figure charts. For example, if an intraday price fluctuated from $14 ½ to $16, it is impossible to know for Point and Figure chart purposes the actual course of the stock from $14 ½ to $16. It could have risen from $14 ½ to $16 in one move, which for a ½-point chart would have been represented by three rising X’s. It might have moved from $14 ½ to $15 ½, back to $14 ½, and then to $16, which would have resulted in two X‘s, two O’s, and then a column of three X’s. The character of the price changes is the major source for the market analyzing.

When dealing with data published in this form, it is better to use larger boxes so that intraday fluctuations do not distort the chart unduly. If more details are required, the data should be purchased from the source that publishes intraday price movements.

Accepted rules for constructing Point and Figure chart based on opening and closing, high and low prices are as follows:

1. If the opening price is closer to the high than low, assume that the course of prices is opening-high-low-closing. 2. If the opening price is closer to the low than high, assume that the course of prices is opening-low-high-closing. 3. If the opening price is in line with the high, assume that the course of prices is opening-low-high-closing. 4. If the opening price is in line with the low, assume that the course of prices is opening-low-high-closing. 5. If the opening price is in line with the low and the closing price is in line with the high, assume that the course of prices is opening-low-high-closing. 6. If the opening price is in line with the high and the closing price is in line with the low, assume that the course of prices is opening-high-low-closing.

Block-diagram is an analogue of Point and Figure chart.

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Image 2. Block-diagram

Point and Figure charts reading

Basics

Point and Figure charts do not use figures of sales volume or time; they only show the price changes. They do not reflect gaps, fragments, and reversal moments of the trend. But, on the other hand, Point and Figure charts efficiently specify support and resistance zones. For example, at weekly bar chart, the rising price is an up-directed leg. If during that week, the strong fluctuations of the price were observed and the price hit support and resistance levels 3-4 times, these fluctuations would be well seen at the Point and Figure chart, raising the significance of this volatile week, compared, let us say, to the nearest longer periods of stability. The next possible trend reversal becomes an explainable.

Patterns, formed by Point and Figure charts, correspond to bar charts’ patterns and are divided into trend consolidation patterns and trend reversal patterns. They have the same meaning as their analogs at bar charts.

Calculation

The significant difference of Point and Figure charts from the bar charts is that Point and Figure charts use horizontal distances for levels' estimation at the pattern limits breakout; while bar charts use the distance between certain horizontal levels. For example, at the breakout of Head and Shoulders pattern for the estimation of the next level, which the prices will reach, bar charts use the distance from the neckline to the top of the head. In Point and Figure charting, the width of the pattern is used to determine the measuring object which is again projected from the breakout point.

The problem is that formation with irregular outlines can generate confusion about where the count should begin. The best approach is to select an important horizontal line in the formation, measure across it, and add (or subtract) the number of boxes in the line to (or from) the level of the line.

Price projection for the Point and Figure formations are by no means 100% accurate in all situations. In general, upside projections are likely to be exceeded on bullish markets, and downside projections surpassed on bearish markets. Projections that are made counter to the prevailing trend have a tendency not to be achieved, such as a downside projection on a bullish market.

Trendlines on Point and Figure charts

It is possible to construct trendlines on Point and Figure charts by joining a series of declining peaks. Up trendlines are drawn by connecting a series of rising lows, and horizontal trendlines are created by joining identical support or resistance levels. The trendline takes its significance from a combination of length, angle of descent or ascent, and the number of times it has been touched. Misleading or whipsaw signals occur occasionally. However, if a carefully chosen reversal is used as a filter in the construction of the chart, such whipsaws can be kept to the minimum. Another possibility would be to draw a parallel line one box above (or below) the actual trendline as a filter and use this as the signal to buy (or sell). Simple filter for Point and Figure chart

An example of the simplest technique regarding the Point and Figure charts is the filter rule: open long position, if the next X appears above the upper level of the previous column of X’s, or open short position, if next O occurs below the low level of the previous column of O’s.

File:Filtr_Krest_nol.jpg

Image 3. Filter on Point and Figure chart.

Conclusion

1. Point and Figure charts measure only one dimension: price.

2. Point and Figure charts are constructed from columns of X’s and O’s, which represent a specified predetermined price movement.

3. Point and Figure charts emphasize the number of price swings that take place within a given congestion area.

4. Point and Figure charts are interpreted similarly to bar charts, the main exception being the measuring formula, which is achieved by the principle of the count.

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