The (P&F) point and figure chart plot a stock’s price movement without the passage of time. P&F charts are made up of Xs and Os. The X’s are rising prices. At the same time, the O’s represent falling prices. They’re housed in price boxes. Each price box represents a specific price that must be reached to get an X or O. In essence, the point and figure chart is like tic-tac-toe.
A Point and Figure Chart, aka P&F chart, is a popular trading indicator. It was designed and meant to be used for long-term investing. The point and figure chart is used to monitor supply and demand. As a result, some traders view it as the simplest way to find entries and exits.
P&F charting is the easiest way to find entries and exits if you plan on growing your investment portfolio.
When we think of charts, we tend to think of candlestick charts. Candlestick charts can still be used to invest. They were implemented as a way to gauge the emotions of other traders. Emotion affects supply and demand.
However, P&F charts can be used in the same manner.
Another important use of point and figure charts is finding trends. Trends are so important in stock trading. Have you ever tried to make money when the market is trading sideways? It isn’t easy unless you’re trading options. Options trading has strategies that make money in neutral markets.
Stocks tend to trade in tandem with how the market is trading. So, a neutral market typically has sideways trading stocks. The trend is our friend.
Time isn’t a factor; it is point-and-figure charting. Only price movement matters. If the price doesn’t move, then the chart doesn’t change. As a result, any small price movements throughout the day are filtered out.
Advantages of a (P&F) Point and Figure Chart
There are advantages to the point and figure chart. You get a unique look at price action with this charting style. It filters out the noise and small price movement. As a result, a chart like this isn’t necessarily good for a day trader who likes scalping small moves.
You’re only seeing the major price moves. The high price of stocks can move a lot during the day. For example, at the end of last year, Amazon moved a total of $50 in one direction in one day. That’s a pretty significant move.
Time doesn’t matter in P&F charts. You’re not looking at 1-minute and 5-minute charts. The only thing that matters is the closing price.
Investors consider point and figure charting easier for finding support and resistance levels. Even support and resistance are important to the point and figure chart. As a result, the most important thing you should remember is that support and resistance are incredibly important to any trading style.
Hence, all traders must ensure they learn the stock market basics, i.e., support and resistance are at the forefront.
Trend lines are another advantage of P&F charts. Changes in trends are going to dictate how you invest. If the trend changes from up to down, you must know where to invest in a bear market. That means the different sectors in the stock market will either be running or make for bad investments.
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The P&F chart has a long history. Did you know it came from an anonymous writer named Hoyle in 1898 who wrote “The Game in Wall Street and How to Play It Successfully”? During that time, they were only known as figure charts, and numbers were used to construct them.
This charting style was much more popular before computers. It was easy for the people who charted. In fact, before computers, we had to look at the newspaper for moving stocks.
As a result, you’d have to be able to chart without a computer, which required graph paper and a pencil coupled with newspaper. We’ve come a long way since then with our fancy trading software and the use of AI trading.
P&F chart basics allowed chartists to chart 50 or more stocks daily in under an hour. If you were an investment firm during that time, you’d need a quick and easy method to find stocks in a trend and store your charts.
How to Read a (P&F) Point and Figure Chart
A point and figure chart is much different from a candlestick chart. P&F charts deal mainly with supply and demand and how it affects price—the same as a candlestick chart.
However, point and figure charts only look at the closing price, whereas candlestick charts look at the day’s open, close, high, and low. If a stock is in an uptrend and the price is rising, as confirmed by at least 3 X’s, then point and figure traders believe demand outweighs supply.
The reverse is also true. If 3 O’s form, then there is more supply than demand. When supply outweighs demand, price tends not to move much. Since trends can take a long to reverse, point and figure charts are designed for long-term investors. As a result, there is no value of the point and figure chart to short-term traders.