What are Point and Figure Charts?

Point and figure charts, as a technical analysis tool, help traders or investors to analyse price movements of assets without tracking time.

It is different from other charts as it displays only the price changes, and as a trader, using a point & figure chart, you can identify trends and adjust your trading strategies.

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A Detailed Process to Read Point and Figure Charts

As you already know, point and figure charts are unique as they track price changes of assets without considering the passage of time, and use symbols for marking and representation. It uses the symbol ‘X’ to indicate a price increase and ‘O’s to indicate a decrease.

To understand the price changes using point & figure charts, traders first determine a box size and a price reversal value. As mentioned, an X is added in a box when asset prices increase. Conversely, to read price drops, an O gets added in the box.

If the asset price reaches the previously set reversal value, a new column appears in the chart. To understand this plotting effectively, let us resort to a short and hypothetical example.

Suppose a trader sets a box size at INR 1, and the reversal is 3 boxes. Now, the price rises from INR 100 to INR 103, the trader would add three Xs.

If the price later falls from INR 103 to INR 99, i.e. a 4-point drop, it meets the 3-box reversal. Thus, a trader would start a new column of Os to show the downward move. In such a way, traders can filter out insignificant changes in asset prices and focus on core trend changes.

Calculation Process of Point and Figure Charts

Now that you know how to plot Xs and Os on point and figure charts, calculating price changes is not much different, but it is a little bit detailed. Take a look at the following section and with the referencing example, note how to calculate trend changes:

1. Choosing the Box Size

   As a trader using point and figure charts, you must first select the box size that essentially represents the price movement to plot a new ‘X’ or an ‘O’. Suppose a stock you are tracking is currently trading at INR 100, and you set the box size to INR 1. It means that to plot a new X or an O, the price must change by INR 1.

2. Plotting of X and O

   You plot a new X if the stock price keeps rising, and as prices keep moving upwards, you stack more Xs and create a column. Now, if the price falls by at least one box, you shift to a new column to the right of the X column. Start adding ‘O’s in that column as the price continues to drop by box size.

3. Set the Reversal Criteria

   By setting a reversal criteria on a point & figure chart, you determine the number of price changes it needs to switch from Xs to Os and vice versa. Typically, traders set the level as multiple box sizes so that only meaningful price shifts trigger a column change.

   Suppose you set a 3-box reversal at an INR 1 box size. Thus, the price must move by INR 3 in the opposite direction to reverse. Now the stock that you have been tracking rose to 103, you plotted Xs, and to reverse, it must fall back to INR 100 to add Os.

4. Trend Lines With Support/Resistance

   Upon plotting the Xs and Os, you must draw trend lines to locate support or resistance levels. Trendlines help connect two or more consecutive X and O columns and indicate the direction of prevailing price changes.

Suppose, due to the price rise from INR 100 to INR 102, there are columns of Xs. Now, you can draw a trend line along those starting points, suggesting buyers are stepping in at those points. Conversely, if the stocks go up to INR 100 and reverse near it, there will be columns of Os and connecting those reversal points, you can draw a support line.

What Does a Point and Figure Chart Indicate?

Upon having an idea of point & figure charting, you must understand its indications in detail, so that you can better identify the price trends. Here is a detailed breakdown:

1. Direction of Trend

   Unlike other charts, point and figure charts use symbols to clearly denote the trend changes either upwards or downwards. Therefore, by plotting Xs, you can measure that prices are going upwards and with Os, you can estimate prices moving downwards. It helps make trading decisions easier.

2. Support and Resistance Level

   As the chart focuses on price shifts without accounting for time, it clearly shows the price points at which asset prices change direction repeatedly. Thus, by locating the price points, you can draw resistance and support lines accordingly.

3. Price Breakout

   With resistance and support lines drawn according to the changing price points, it helps identify a breakout. For example, if a breakout happens beyond the resistance level with a strong trade volume, you might enter a long position. Conversely, if the breakout occurs below the support level, as a trader, you might open a short position.

4. Indicates Price Patterns

   With a P&F chart, you can easily spot some classic price patterns of an asset. They include double top, double bottom and triangles.

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Components of the Point and Figure Charts

After having an idea of what is point and figure charts, their reading, calculation and indications, you must note their key components that are responsible for showing price trends:

1. Box Size

   As you know, to read, plot or calculate, you must set a box size that reacts with price movements of assets. In a point & figure chart, a small box typically represents a smaller price movement. On the other hand, a larger box typically does not capture minor price changes.

2. Xs and Os

   The technique of showing price movement is clearly straightforward with point and figure charts. A plotted X on this chart shows a rising price, and O shows the price declining. One unique characteristic of these symbols is that each of them filters out minor price fluctuations. It lets traders locate clean breakouts or breakdowns that might be harder to spot on time-based charts.

3. Reversal Criteria

   This criterion acts as another crucial component. It indicates the number of boxes increment needed for the current trend reversal and initiating a new column. In trading, typically the reversal criteria include 1, 2, or 3 box sizes to indicate potential reversal.

4. Trend Lines

   Trend lines connecting two or more adjacent X and O columns effectively indicate the potential direction of the prevailing trend in the market.

Advantages of Point and Figure Charts

Compared to traditional time-based charts, point & figure charts have the following benefits that you must note before using them:

1. Removes the Time Factor

   Traditional or time-based charts sometimes might distort charts and clutter the vision of traders. As point and figure charts exclude time factors, they provide a comparatively clear picture of price trends of assets.

2. Eases Trend Identification

   By plotting Xs and Os and setting a box size for reversal, it acts as a potentially effective tool to locate price points where there might be reversals. Thus, it helps traders to jump into trades and make effective decisions.

3. Simple by Nature

   By now, you must have understood that point and figure charts are easier to understand, and therefore, it is easier to understand for both beginner and seasoned traders.

Disadvantages of Point and Figure Charts

Apart from its simplicity and ease of understanding price trends, there are a few disadvantages associated with it that you must note. Here is a detailed breakdown:

1. Time-Related Information

   Although by excluding the time factor, point & figure charts simplify the price trend, it also acts as a limitation. Due to excluding the time, it cannot present well the speed of price change or the time duration for which prices have been changing. Some trading strategies might require such time-related data, and for those, this chart might not be suitable.

2. Delayed Signal

   Such a chart might produce signals that might be significantly delayed compared to traditional time-based charts. Thus, it might lead to possible missed trade opportunities or delayed entry into the market.

Conclusion

Point and figure charts indicate changes in the price trend of assets by plotting ‘X’s on the chart, indicating a price rise. With ‘O’s, it represents a drop in asset prices. Compared to time-based charts, it produces a clear picture of price trends. It does not account for the time factor and thus eliminates minute fluctuations in prices..

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FAQ’s on the Point and Figure Charts

1. How does a Point and Figure chart help in stock analysis?

With plotted X and O columns on the chart for price rise and drops respectively, it indicates price trends with clarity. Also, by drawing trend lines and locating breakouts, you can decide to open a long and short position.

2. How to create a Point and Figure chart in the stock market?

You must first select the box size and set a minimum price movement. Choose the reversal amount, i.e. the box sizes it needs to show a reversal. Plot Xs as the price rises and Os as the price declines.

3. What is the meaning of box size and reversal in Point and Figure charts?

Box size is the minimum amount of price change needed to add either an X to show an uptrend or an O to show a downtrend. A reversal point represents the number of required boxes to show a price reversal and create a new column.

4. What does a breakout mean in a Point and Figure chart?

A bullish breakout in point and figure charts happens when an X column typically breaks beyond the high of the previous X column. A bearish breakout usually happens when an O-column breaks below the earlier O column.