Point and Figure Charting: A Basic Introduction

Designed for long-term investment, tally and figure (P&F) charts have been described as one of the simplest systems for determining solid entry and exit points in store up market trading. The system monitors supply and demand of each issue while keeping a keen eye on developing inclines. While point and figure charting has never been at the top of the list of popular techniques used by technical analysts, there is a enlarging interest in P&F from all corners of the charting community. Here we take a close look at P&F charts and how to read and construct them. (For diverse on charting, check out Charting Your Way To Better Returns.)
TUTORIAL: Technical Analysis

Conventional complicated analysis charts tend to be the open-close/high-low chart. In the creation of P&F charts, the emphasis is only on the closing price of an topic. The developers of P&F charting were interested in trend development and thus were not concerned with the noise created daily by boy moves up or down, but with how the larger picture played out from a supply and demand perspective.

The key to P&F charts is the establishment of the portion of price, which is the unit measurement of a price movement plotted on the graph. On P&F charts, there is no time axis, alone a price axis. Rising stock prices are shown with X’s and falling prices are shown with O’s. These intentions appear on the chart only if the price moved at least one unit of price in either direction.

So say the closing prices of a forefather moved up one price unit three times. This would appear as a column of three X’s. If the price movement changes direction, the chart shows a new column of O’s, wherein an O is plotted for each unit of price movement. X’s and O’s never appear in the verbatim at the same time column. The chartist, however, must establish how many price units make up a box, which is how much the price forced to move in the opposite direction for the chart to begin a new column.

Let’s say, for an example, the stock you were tracking was trading at $25, and you were ending a $1 unit measurement and a reversal box is three units. Now, if the stock had been trading upward to $25, the stock order have to close at $22 before the chart would reverse to a column of O’s. Because each unit of price course must be plotted, each unit of price movement down from the $25 level must, in this new column of O’s, be characterized by one O. The next reversal would have the stock trading up at least $3, or three points, before a new column of X’s found back into view on our P&F chart. Assume then that the issue continues to fall to $20 before reversing itself; the X’s leave reappear once the price hits $23. Remember, you choose the unit size. It could be $0.50, $1 or even $2 if the founder price is high enough. Graphically, the first two columns of our example would look like this: