Point & Figure

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Description

Point & figure (P&F) charts differ from "normal" price charts in that they completely disregard the passage of time and only chart changes in prices. Rather than having price on the y-axis and time on the x-axis, P&F charts display price changes on both axes.

P&F charts display an "X" when prices rise by the "box size" and display an "O" when prices fall by the box size. Note that no Xs or Os are drawn if prices rise or fall by an amount that is less than the box size.

Each column can contain either Xs or Os, but never both. In order to change columns (e.g., from an X column to an O column), prices must reverse by the "reversal amount" multiplied by the box size. For example, if the box size is 3 points and the reversal amount is 2 boxes, then prices must reverse direction 6 points (3 times 2) in order to change columns. If you are in a column of Xs, the price must fall 6 points in order to change to a column of Os. If you are in a column of Os, the price must rise 6 points in order to change to a column of Xs. The changing of columns signifies a change in the trend of prices.

Because prices must reverse direction by the reversal amount, each column in a P&F chart will have at least "reversal amount" boxes.

When in a column of Xs or Os, MetaStock Pro will first check to see if prices have moved in the current direction (e.g., rose if in a column of Xs or fell if in a column of Os) before checking for a reversal. MetaStock Pro uses the high and low prices to decide if prices have changed enough to display a new box.

Indicators calculated on P&F charts use all the data in each column and then display the average value of the indicator for that column.

Interpretation

P&F charts are designed to display the underlying supply and demand of a security. A column of Xs shows that demand is exceeding supply (a rally); a column of Os shows that supply is exceeding demand (a decline); and a series of short columns shows that supply and demand are relatively equal.

There are several chart patterns that appear repeatedly in P&F charts. These include Double Tops and Bottoms, Bullish and Bearish Signal formations, Bullish and Bearish Symmetrical Triangles, Triple Tops and Bottoms, etc. It is beyond the scope of this website to fully explain all of the possibilities.