To the trading community, most traders are familiar with line charts, bar charts, and candlestick charts. These charts are used on a daily basis to follow various markets, and make trading decision as well. Compared to these widely used chart methodologies, fewer traders understand point and figure charts, let alone use it to their benefits. 

Understanding Point and Figure Charting

P&F charts are formed by alternative columns of stacked X’s and O’s, with X represents price rise, while O indicates price fall. There is no time axis on point and figure charts, which is different from other traditional chart techniques.

To create a P&F chart, two numbers need to be laid down first – box size and reversal box number. The box size is defined as the minimum price movement. Any price change smaller than the box size will be discarded, hence filter out minor price fluctuations. The reversal box number is used to define the size of reversal to alternate current price direction. The standard reversal box number is 3, so the reversal size equals to three times of the box size.

Take USD/JPY as an example; if the box size is 25 pips, and the reversal box number is 3, then the reversal size is calculated as 25x3=75 pips. Let’s start with an uptrend, the current price should be in X column on P&F chart. Any advance less than 25 pips will be omitted. For every advance of 25 pips there will be one more X added on top of the column. For any decrease less than 75 pips, the price will remain at the current X column. If the decrease is more than 75 pips, the uptrend is deemed reversed, hence the price is shift from current X column to O column.

Creating Point and Figure Chart

As long as the basic rules are clear, the creation of a P&F chart is quite straight forward. P&F charts can be constructed either manually or automatically using P&F software. The simplest way is using pencil and graph paper. Another practical way is creating PnF with Excel.

Point and Figure Analysis & Point and Figure Patterns

Since the smaller price fluctuations are eliminated during the construction of P&F charts, it’s much easier to identify major support and resistance levels, rule out various false breakouts, and recognize recurring patterns as well.

The above PnF chart is a real world example for USD/JPY in latest three month. The chart was generated based on hourly data using Excel. Green filled color indicates breakout, red means breakdown, cyan represents resistance, and yellow signals support.

For example, USD/JPY made a double bottom breakdown at 95.50 on July 5, then the downtrend momentum broke the support at 95.00 and 94.00 separately. There is a 350 pips drip after the given the breakdown signal.

While there are only three PnF patterns in this example – double top, double bottom, and triple bottom, much more patterns can be referred to the following books.

Point and Figure Charting Books

There are three great books written about P&F charts. Reader can pick any one of them to further explore P&F charts.

The Definitive Guide to Point and Figure, by Jeremy Du Plessis

Point & Figure Charting, by Thomas J. Dorsey

Complete Guide to Point-and-Figure Charting, by Heinrich Weber

Point and figure charts can be applied to any financial market, such as futures, stocks, indexes, and currencies. PnF is perfect for trend trading. It can be used in day trading as well. Once traders understand how to create and read PnF charts, they will get hooked, and never look back. Definitely P&F should be included in any serious trader’s toolbox.For more information, visit point and figure charts.