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Nov 25, 2007 - This one advantage from P&F charts: support and resistance, horizontal or angled trendlines are clearly located and marked...
Before personal computers became a required tool in every trader’s desk, there were hand-drawn charts of bars and candlesticks and even the little known chart type called Point-and-Figure (P&F) charts. After decades of the advancement of technology, P&F became forgotten while math-based indicators proliferated, the traditional as well as the newly created by vendors on and off Wall Street. But lately, more and more chart software are bringing it back, namely SwingTracker. Despite the vendors offering this feature, there is very little knowledge of what it is and how to apply to trade or invest. This primer will explain the basic understanding of P&F charts as well as the main benefits and drawbacks compared to other chart types. In order to understand this type of charting, visual aids are a must. Below is the typical chart with columns of X’s followed by columns of O’s. Despite it not looking as logical as other charts, they do make sense after the explanation.
The chart are made of columns of X’s and O’s, X’s are drawn when the prices go up and marked at where prices stopped advancing; likewise, the O’s are drawn when prices go down. Now, how are they drawn? There are three parameters that make up the rules on how and where these X’s and O’s are drawn. The first rule is the box size. For example, the box size can be equal to $1 for a stock. So if prices move up $1 from $135 to $136, then one X is marked. If it moves up by $2, then the column will have two Xs. If prices move down $1, then one O is marked. This establishes when and where an X or an O is drawn. The second parameter dictates when a new column is drawn. The number of boxes must be completed before a new column is drawn. So if there are 3 boxes minimum that must be drawn before a reversal reversal column (O’s). 3 boxes represent $3 ($1 per box). The rule is annotated like this: 1x3 (1$ box size at every 3 boxes). The last parameter is the chart timeframe type. It can from 1-,5-,15-,30-, or 60-minutes charts for intraday and daily, weekly and monthly for longer term. These settings depend on each trader’s personal preferences and trading style. The sensitivity can be changed either by changing the box size; reducing the box size amount will make the charts more sensitive to movements, say from $1 to $0.50 per box. Likewise with the increasing the number of boxes required for a reversal decreases the sensitivity of the price movements.
Comparing the Point-and-Figure charts to the conventional candlesticks (or bar and similar), the P&F comes out clean and smooth while the jagged movements of the regular charts can and do force traders to trade erratically and even overtrade. Because time is not an essential element, only prices dictate the charts. The second objective is to learn how to read it. Since there are only X’s and O’s, the logic is quite simple, the next task to incorporate trendlines and patterns to get a clearer idea what the price action is really show. Since the charts are smoothed out, the simple trendlines will do well in signaling an on-going trend or a reversal ahead, similar to conventional charting. If prices in the current column move higher than the last column, then a breakout to the upside is taking place; if prices move lower than the last column, then a breakout to the downside is taking place.
This one advantage from P&F charts: support and resistance, horizontal or angled trendlines are clearly located and marked. This simplifies trading and avoids confusion when it comes to making a decision to enter or exit or do neither. The next article, the topic on entering and exiting the trades using P&F will be extensively discussed. Discuss this article in the forum. ...thanks
for the trust you've shown in me and my business.
Disclaimer: Please note that charts and commentary provided by the moderator are for educational purposes only. Any trades placed upon reliance on the moderator’s charts or information is taken at your own risk for your own account. Past performance is no guarantee of future results. While there is great potential for reward trading stocks, futures and options, there is also substantial risk of loss and you must decide your own suitability to trade. Future trading results can never be guaranteed. This is not an offer to buy or sell stock, futures, options or commodity interests. Most trading systems are based on historical formulas which have worked in the past. However, what has happened before may or may not happen again. You can lose all your money trading stocks, futures, and options and you must decide your own suitability as to whether or not to trade. Only trade with true risk capital you can afford to lose. Only trade markets you can properly afford to trade. Properly funded trading accounts typically perform better than those that are not. Never risk more than 2-3% of your account on any one trade. Always define your risk before entering a trade and place a stop to limit your risk. There are no guarantees or certainties in trading. Trading involves hard work, risk, discipline and the ability to follow rules and trade through any tough periods during a system’s draw downs. If you are looking for a guarantee, trading is probably not for you. Most people lose money trading. One of the reasons is that they lack discipline and are unable to be consistent. A system can help you become consistent. Ironically, worrying about the monetary aspect of trading can contribute to and cause a trader to make trading errors. Therefore, it is important to only trade with true risk capital.
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