Point and Figure Charting Point and Figure Charting Point-and-figure charting is credited to Charles Dow, who is said to have used it just prior to the turn of the twentieth century. This method differs from ordinary charting in three important ways: It eliminates price reversals that are below a minimum (box) value It has simple, well defined trading rules It has no time factor. As long as prices fail to change direction by the reversal value, the trend is intact. When point-and-figure charting first appeared, it did not contain the familiar boxes of X's and O's. The earliest published book containing the subject is reported to be The Game in Wall Street and How to Play it Successfully, published by Hoyle (not Edmond Hoyle, the English writer) in 1898. The first definitive work on the subject was by Victor de villers, who in 1933 published The Point and Figure Method of Anticipating Stock Price Movement. De Villers worked with Owen Taylor to publish and promote a weekly point-and-figure service, maintaining their own charts; he was impressed by the simple scientific methodology. As with many of the original technical systems, the application was intended for the stock market, and the rules required the use of every change in price appearing on the ticker. The rationalization for a purely technical system has been told many times by now, but an original source is often refreshing. The unique aspect of the point-and-figure method is that it ignores the passage of time. Unlike bar charts, you do not make a single vertical mark and then move to the right a uniform distance. Each column of a point-and-figure chart can represent any length of time. The measurement of a significant change in price direction alone determines the pattern of the chart. The original "figure charts" were plotted with only dots or with the exact price in each box or with a combination of X's and occasional digits (usually 0s and 5s every five boxes) to help keeping the chart aligned. A geometric representation was also created by connecting the points in each column with a vertical line and closing the gap between columns with a crossbar on top for a reversal down and a bar at the bottom if the next column goes up. Charts using one, three, and five points were popular, where each point represented a minimum price move. In the 5-point method, no entry was recorded unless the price change spanned 5 points. The rules for plotting point-and-figure charts are easily shown as a flowchart (figure 9-2). In general, preference is given to price movements that continue in the direction of the current trend. Therefore, if the trend is down, the low price is of greatest importance. The opposite price is checked only if the new price fails to increase the length of the column of the current trend. The traditional point-and-figure method calls for the use of a "three-box reversal," that is, the price must reverse direction by an amount equal to three boxes from the most extreme box of the last column (it actually must fill in the forth box since the extreme box is left blank) before a new column can begin. The importance of keeping the three-box reversal has always been questioned by experienced point-and-figure traders. It should be noted that the new reversal amount (the box size times the number of boxes in the reversal) is the critical value. For example, a $4 box for gold, with a three-box reversal means that gold must reverse. Trendlines The bullish and bearish trendlines important to bar charting also exist for point-and-figure charts. The top or bottom box that remains blank when a reversal Figure 9-3 Breakout of a triple top Ascending triple top Spread triple top Upside breakout of a symmetric triangle Upside breakout of a bullish resistance line Bullish Catapult Upside breakout of a bearish resistance line Upside breakout of an ascending triangle (a) Breakout of a triple bottom Descending triple bottom Spread triple bottom Downside breakout of a symmetric triangle Downside breakout of a bearish support line Bearish Catapult Downside breakout of a bullish support line Downside breakout of a descending triangle (b) Figure 9-4 (a) Compound Point-and-figure downside alerts. (b) Compound point-and-figure upside alerts Figure 9-5    Point-and-figure trendlines occurs often forms the beginning of a descending or ascending pattern at a 45o angle (providing the graph paper has square boxes). These 45o lines represent the major anticipated trends of the commodity. Once a top or bottom has been identified, a 45o line can be drawn down from the upper corner of the top boxes of x's toward the right, or up from the bottom of the lowest box o's towards the right (Figure 9-5). These trendlines are used to confirm the direction of price movement and often "filter" the basic point-and-figure trading signals so that only those signals are taken that agree with the 45o trendlines.  Back to the Learning Center Home Page »