The (P&F) point and figure chart plots a stocks price movement without the passage of time. P&F charts are made up of X’s and O’s. The X ‘s are rising prices. While the O’s are representing falling prices. They’re housed in price boxes. Each price box represents a specific price that has to be reached in order 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 as a way 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 emotion 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 to market is trading. So a neutral market typically has sideways trading stocks. The trend really is our friend.
Time isn’t a factor is point and figure charting. Only price movement matters. If price doesn’t move than the chart doesn’t change. As a result, any small price movements throughout the day are filtered out.
Advantages of a P&F 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 the small moves.
You’re only seeing the major price moves. The high price stocks can move a lot during the day. For example, Amazon moved a total of $50 in one direction, in one day at the end of last year. 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 to be easier at finding support and resistance levels. Even support and resistance is an important part of the point and figure chart. As a result, the most important thing you should remember is that support and resistance is incredibly important to any style of trading.
Hence all traders need to make sure they learn the basics of the stock market; i.e. support and resistance being at the forefront.
Trend lines are another advantage of P&F charts. Changes in trend are going to dictate how you invest. If the trend changes from up to down then you need to 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.
The P&F chart has a long history. Did you know that it came from an anonymous writer named Hoyle back in 1898 who wrote “The Game in Wall Street and How to Successfully Play It”. During that time they were only known as figure charts and used numbers to construct it.
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 stocks that were moving.
As a result, you’d have to be able to chart without having a computer. That required graph paper and a pencil coupled with newspaper. We’ve come along way since then with our fancy trading software and use of AI trading.
P&F chart basics allowed chartists to chart 50 or more stocks every day 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 as well as a way to store your charts.
How to Read Point and Figure Chart
A point and figure chart is much different from a candlestick chart. P&F charts deal mainly in supply and demand and how it affects price. The same as a candlestick chart.
However, point and figure charts only look at closing price whereas candlestick charts look at the open, close, high and low of the day. If a stock is in an uptrend and 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 than there is more supply than demand. When supply outweighs demand, price tends not to move much. Since trends can take a long time to reverse, point and figure charts are designed for the long term investor. As a result, there is no value of the point and figure chart to short term traders.