With this article I will introduce Point and Figure charts: how to understand them, and how to recognise some simple patterns. My main source will be Jeremy du Plessis’ The Definitive Guide to Point and Figure, which you might be interested to purchase from the Global Investor Bookshop (in association with FuturesTechs).
Point and Figure is a very old method of charting price action, which originated when traders were simply recording the prices as they saw them happen: 14.50, 14.55, 14.60, 14.55, etc.
This gradually evolved to the point where traders were filling out boxes on a graph corresponding to price levels which the market had crossed, moving to the right each time that the price retraced over an old price level. Eventually, we got the modern Point and Figure chart.
Here’s the most recent NASDAQ chart:
As indicated, the X’s are drawn when the price has increased, while the O’s are drawn whenever the price has decreased.
In the example above the intervals used are just a point wide (the “box sixe”), meaning that we change from X to O (or O to X) and move to the next column whenever the price moves by just a point in the opposite direction to the previous move.
That makes this a very short-term chart, of course. With one-point reversals happening all the time, a couple of hours’ trading will quickly fill up the chart.
The two ways we can make it longer-term are:
- Increase the box size
- increase the reversal size
Increasing the box size should be obvious enough; instead of recording 1-point movements, we’ll record 10-point movements, for example. Here’s the first chart modified in this way:
These boxes stretch back a couple of weeks now, instead of a couple of hours.
Now let’s change the reversal size, the size of the reversal which needs to take place before we change between x’s and o’s and move into the next column. This is measured in terms of boxes, and is set to 3 in the below chart:
The above chart stretches back a couple of days. For a bigger picture view combining both changes, we could require 3-box reversals for 10-point boxes, i.e. requiring 30-points reversals before changing direction on the chart. The below chart represents the price action of a year:
One thing you might have noticed at this point is that we don’t really have a proper time axis. That’s true. While it’s true that time is progressing as we move from left to right on the chart, it’s not doing so on a constant basis. The chart only moves right when we get a sufficiently large change in direction (as defined by our parameters). The chart only changes when the price does. So, instead of being a traditional time vs. price chart, Point and Figure is instead an original way of drawing the price action.
We’re going to look at some patterns now, focusing on charts with 3-box reversal sizes. Any box reversal size can be used, and some care should generally be taken to choose the one that leads to the most favourable chart for the desired timeframe.
That said, we usually don’t like to use 1-box reversals. Charts look very different with 1-box reversals, being of a much shorter timeframe and with very different-looking patterns. Much of the difference is related to the fact that a 1-box reversal chart can have columns with just a single entry of , i.e. when we get two reversals in quick succession.
Check out the Difference between the CAC futures charts below. The top is a 10 x 1 (10 points, 1-box reversal) chart, while the bottom is 10 x 3.
Besides being of a much shorter timeframe in the same space, we can see that the one on the top does indeed have many columns with just a single X or O.
The advantage of sticking with reversal sizes of 2, 3 and more, is that we get to take advantage of the resulting asymmetric filter. The chart is biased to ignore movements in the opposite direction to the prevailing trend that do not satisfy the box size criterion. While a move of, say, 10 points in the prevailing trend will be charted, a move in the other direction won’t be plotted until it reached, say, 30 point.
So let’s have a look at some simple patterns.
The double-top buy is seen when the price reverses off a high, then comes back and breaks through it on the second attempt. It’s an awkward name since the Double Top bearish reversal pattern in mainstream bar/candlestick analysis, but the context is usually clear enough. Here’s an example of it in an uptrend:
Equally, the double-bottom sell occurs when we get the creation of a lower low:
These can be reversal or continuation patterns, depending on the previous trend. As continuation patterns, they tend to be a little more reliable (in accordance with the general principle that trends have a universal tendency to continue!)
In a similar vein to the above, we can have triple-top buy and triple-bottom sell signals. Indeed, we can have any number of tests before the breakout, with all manner of compound patterns.
The first of these buy signals comes after a failed attempt by the bulls to break through the previous highs (indeed, the correction causes a failed reversal triple-bottom sell signal. Our bias is to trade with the prevailing trend, so hopefully we would not have seized on that false signal):
In our next post on this topic, I’ll cover a selection of more advanced patterns and have a look at the price targets we can derive from them.
For now, this has been an introduction to Point and Figure charting. If you have any questions or comments, please don’t hesitate to get in touch. To subscribe to our daily technical analysis of the futures and FX markets, please sign up for a free trial.
Graham Neary MSTA (firstname.lastname@example.org)