Bar charts and candlestick charts show the high low open and close price for a given period. Point and figure charts represent price in a radically different manner from the more familiar bar and candlestick charts. Many forex charting platforms provide the option of point and figure charts.
Point and figure charts do not show any timeframe. This may confuse you in the beginning. Point and figure charts are a pure price action play because these charts generally exclude all other elements like time, volume and open/close other than price. Point and figure trading is based exclusively on price action.
Technical analysis is the study of price action. Technical analysis is used to predict or confirm an uptrend or downtrend or a consolidation in the market. Point and figure charts represent clear evidence of such important technical characteristics like trend, support/resistance and breakouts. Thus a point and figure chart focuses on the behavior of price action which is the most important factor from the technical analysis point of view.
If you look at the point and figure chart you will see many columns with Xs and Os marked in them. How do you figure out what does this means? A point and figure chart has got Xs and Os. A point and figure chart is constructed with a column of boxes alternately labeled with Xs and Os. An X column means that the price has risen in that column. Conversely, an O column means that the price has declined in that column.
So there is no concept of time in a point and figure chart. Only when price moves a significant amount regardless of time will an existing column grow or a new column is created. A new column is created going in the opposite direction when a reversal occurs on any column. So there is no time, volume, opens and close on point and figure charts.
How is a point and figure chart constructed? It depends on two variables. The first variable is the box size. This is the minimum amount that the price is supposed to move before a new box in the existing column is created. These two variables can alter the way the point and figure charts look and act.
You will see many columns of Xs and Os in the point and figure chart. X is equal to fixed price increase. Each X denotes a rising trend. For example, price would need to move an additional amount equal to the preset box size before another X would be added to the top of the column if a column of Xs has 10 boxes.
You can use the charting software to do the actual drawing. However, you should understand the concept behind the point and figure chart. Suppose, you are using the point and figure chart. You set the box size on the point and figure chart to be equal to 10 pips on the point and figure charting software.
X column and O column. In an X column, the price would have to move another 10 pips above each X box before another X could be added on top of that X. On the other hand, in an O column, price would have to move 10 pips lower than the each box in O column to add another O box on the bottom of the column.
The second important variable is the reversal amount. How do you decide to add another column to the point and figure chart? It depends on the reversal amount. This is the amount of pips the price needs to reverse before a new column is created.
The second most important variable for a point and figure chart is the reversal threshold. The most common amount of reversal threshold is three boxes or three points. A new column is only added when a reversal in an existing column exceeds the reversal threshold.
What should be the reversal threshold or the reversal amount before a new column is added? The reversal amount in pips is 30 pips if the box size is set at 10 pips and the reversal amount is set at three boxes. So in case of a rising X column, price would need to turn back by at least 30 pips before a new O column would be added.
By only focusing on the pure price action, a point and figure chart reduces the unrelated noise in the price action. These two variables the box size and the reversal threshold make the point and figure chart so effective at representing only the most major market moves disregarding all minor fluctuations known as noise. The significance of these two variables, the box size and the reversal threshold should be clearly understood.
One of the best trading strategies in most common use with the point and figure charts is breakout trading since point and figure charts outline support and resistance so well. The point and figure charts are excellent indicators of both trend and support/resistance.
A double top is a potential bearish reversal signal in bar and candlestick charts. Now you must understand that there is a notable distinction between the bar and candlestick charts and the point and figure charts in the interpretation of double and triple tops and bottoms.
Are you familiar with the chart patterns like the double and triple tops and bottoms? They are taken as important reversal signals in the trend. However, a double top is a resistance point where traders should be looking for a bullish break to the upside on the point and figure charts. The same difference holds for the double bottoms as well as triple tops and bottoms.
The main method of trading trendlines and pattern on the point and figure charts is through breakouts like the horizontal support and resistances levels on these charts. Charts patterns like triangles are prevalent as well. Point and figure charts also have their own versions of diagonal trend lines which are drawn at 45 degrees.
Point and figure charts give a very clear view of the market movements. Price action is the most important aspect of technical trading. The point and figure charts focus exclusively on the price action.
Point and figure charts had originated in the 19th century. Point and figure charts are still popular with traders today as an increasingly relevant analytical tool for forex traders. It is because of this clarity in viewing and interpreting the price movements that the point and figure charts have withstood the test of time.
Point and figure trading depends on the trendlines, support/resistance and breakouts. Point and figure charts excel at representing clear evidence of such important technical characteristics as trend, support/resistance and breakout without the extraneous elements to clutter the picture.
What makes the point and figure charts so special? Other data that is readily available on the bar and candlestick charts like time, period opens/closes are generally excluded on the point and figure charts. This leaves only the uncluttered purity of price action. Some may characterize point and figure trading as based upon pure price action.