V.11:1 (30-33): Point & Figure Charting by Gary Van Powell

Point & Figure Charting by Gary Van Powell

Point and figure charting, a technique for following stocks and commodities, may be simplistic but still offers the keys to success: trend identification, price objectives and money management, all of which it provides.

Using point and figure, also known as the price reversal method, is an excellent way to identify reliable buy or sell signals for trading individual stocks. Point and figure charts are designed to remove market noise, thus allowing the market participant to trade the real moves, leaving the insignificant moves to the short-term traders. The noise is filtered out by plotting point and figure. This charting technique requires less time to keep updated than do other methods.

Plotting a point and figure chart is straightforward. Here, we will use Xs and Os to graph price movements. The scale for the vertical axis is known as the box size. For example, the box could equal one point. As prices rise, place an X on the chart for each price rise equal to the box size chosen. To plot a downtrend, plot an O for each price decline equal to the box size chosen.

To consider a movement on a point and figure chart a trend reversal — that is, a change from an up market to a down market or from a down market to an up market — a change in price by a preselected amount must occur. Typically, a three-point or three box reversal is used. As long as the price advance does not reverse by three points (boxes), the uptrend is still intact. If the price does decline three or more boxes, then the Os are entered in the next column, indicating the price movement downward.