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Computerized Investing > January 17, 2015

Point & Figure Charting

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by Wayne A. Thorp

I consider myself a fundamental investor, spending my time poring over financial statements, ratios and multiples, as well as analyzing industry trends and competitors. However, I still look at price charts when considering an investment. Even if I am going to buy a stock or ETF (exchange-traded fund) that I plan on holding for months or even years, I use price charts to possibly identify an optimal entry point. If a stock I am looking to buy is in a downtrend, price charts may help me identify when it has found some support. Likewise, if a stock is consistently running into resistance at a certain level, I may hold off to see if it can break through and perhaps start a new uptrend. On the sell side, if I can use charts to squeeze out some additional profits, I am all for it.

There are a number of different types of stocks charts available to investors: simple line charts of closing prices, open-high-low-close bar charts, candlestick charts and more. One chart that I use more than any other is the point & figure chart.

One of the basic principles of economics is the law of supply and demand. It states that in a free market when there are more buyers than sellers (demand outstrips supply), prices will rise, all else being equal. Point & figure charts (P&F) attempt to capture the battle between supply and demand.

Many investors and traders are not familiar with this unique chart, even though it dates back to the late 1800s, so this article serves as a primer to this useful chart type.

P&F Overview

Figure 1 is an example of a point & figure chart for Occidental Petroleum Corp. (OXY) through December 31, 2014. As a means of comparison, Figure 2 is a bar chart (open-high-low-close) for Occidental for roughly the same time period shown in Figure 1, from August 2012 through the end of 2014. Point & figure charts are unique for a number of reasons. First, price movements are represented with rising X-columns and falling O-columns. Additionally, each X or O is called a “box,” which represents a specific value that the price must reach in order to add an X or O. Because new Xs or Os are only added based on minimum price moves, point & figure charts are also unique in that time is not a factor. Unlike Figure 2, which shows price in a linear fashion, the point & figure chart in Figure 1 develops as the price moves. If price does not move by the minimum required amount, no change is made to the chart. As long as the price is rising, the point & figure chart stays in the rising X-column. Likewise, as long as prices decline, the point & figure chart remains in the declining X-column. Using classic three-box reversal point & figure charts, a shift from a column of Xs to a column of Os, or vice versa, requires a three-box minimum reversal to shift to a new column. We will discuss this more in depth a little later.

Point & figure charts are useful to investors and traders in several ways:

  • Filter insignificant price movements and “noise”
  • Focus only on “important” price movements
  • Remove time as a factor from the analysis process
  • Make support and resistance levels much easier to identify
  • Provide automatic and subjective trendlines

P&F Chart Settings

Several websites offer point & figure charts, although they are not as prevalent as other chart types. My favorite site for point & figure charts is StockCharts.com. Depending on the site you are using, or if you are plotting your own point & figure charts, there are a few settings you need to be aware of.

Box Size

The box size is based on the scale you wish to use for a particular security or index and represents the value given to each box, X or O, on the chart. It is the minimum price change needed to continue the current trend—i.e., to add another X to the top of a column of X’s or to add another O to the bottom of a column of O’s. This is an important decision because a move of $3 for a $10 stock is more dramatic than a $3 move on a $100 stock. In our example in Figure 1, each box corresponds to a $1 stock price move. Furthermore, since point & figure charts are used to filter out “noise” in the market, you want to be sure that you are filtering out most momentary price reversals, yet at the same time allowing some to pass through so that you can identify when a significant reversal is taking place.

As you use point & figure charts, you may find that different box sizes work better for your trading style or for a particular security. Table 1 shows the traditional box sizes based on price level.

Reversal Method

The other key to the analysis of point & figure charts is how you move from one column to another, called the “reversal method.” The reversal amount determines how many boxes the price must reverse course by in order to move to a new column and switch from X’s to O’s, or vice versa. While this can be left to the individual creating the chart, the typical reversal is the three-box or three-point reversal. This methodology is thought to eliminate spurious price fluctuations and focus only on “meaningful” price movements.

Price Range ($) Box Size ($)
Under 0.25 0.0625
0.26 to 1.00 0.125
1.01 to 5.00 0.25
5.01 to 20.00 0.50
20.01 to 100.00 1.00
100.01 to 200.00 2.00
200.01 to 500.00 4.00
500.01 to 1,000.00 5.00
1,000.01 to 25,000.00 50.00
25,000.01 & up 500.00

 

Based on the traditional parameters shown in Table 1, if a stock is trading below $5 with a box size of $0.25, it would take a price move, up or down, of $0.75 to generate a three-box (three-point) reversal. That is, the box size for stocks trading below $5 is $0.25, so a three-box reversal would take at least three $0.25 price moves, or $0.75 ($0.25 × 3), to necessitate a shift to a new column of X’s or O’s. The same principle applies no matter the box size. Depending on the software package or website you are using to create point & figure charts, you may have the ability to specify the box size as well as the reversal amount.

After establishing the parameters for the essential elements of a point & figure chart, you must then look at which price(s) you will use to plot your chart. Purists generally use the high and low prices for the period (day, week, month, etc.), while others may focus strictly on a single price such as the close. This decision may be driven by the data source you are using—whether or not it offers high and low prices or merely the closing price—as well as the security you are plotting. If you were charting a mutual fund, which only trades once a day, you would have to use the closing price. You may get different results depending on the price(s) you use. For this reason, it is also important to find out the method used by a software package or website to create point & figure charts. The point & figure chart in Figure 1 is constructed using the high-low method.

When creating point & figure charts, you remain in the same column of X’s or O’s as long as prices continue to rise or fall, respectively. For example, if a chart is in a column of X’s and prices are rising, you would need to identify whether the price raised one full box or more. If you are basing your decisions on high and low prices and not the closing price, this is done by looking at the high price for the day. If the price did rise by at least one box, you would add an X to the top of the column. At that point, you are done for the day. As long as prices continue to rise (or do not fall), the low price is disregarded. If the high price rose by one box but the low price was several box sizes below it, you still only plot the one box increase. As long as prices continue in their current path, you are only interested in one direction per period.

If, however, the price does not rise by at least one box the next day (staying with our example of being in a column of X’s), you must look to see whether the price reversed by three or more boxes. If it did not, nothing is added to the chart for that day. This is an example of point & figure charts filtering out “insignificant” price movements; it also illustrates its difference from bar charts, where we would still plot a bar even if prices do not move. If and when the price reverses downward by three or more boxes, you would shift one column to the right and begin plotting a new column of O’s.

Month Markings

As we have mentioned, point & figure charts do not show time in a linear fashion. Comparing Figures 1 and 2, we can see that the spacing between the price change for point & figure charts is not symmetrical. The chart develops as there are large enough price changes to warrant a new X, a new O or a new reversal column. To note the monthly passage of time on a point & figure chart, numbers and letters on the chart indicate when a new month has begun. For instance, the number “2” shows where February started. The letters “A”, “B”, and “C” are used to indicate beginning of October, November, and December. You can see these month markers on the chart in Figure 1.

High-Low Method

As we mentioned earlier, there are two pricing methods available for creating point & figure charts: the high-low method and the close method. Both methods use only one price point. As its name suggests, the close method uses the closing price only. The more commonly used high-low method uses the high or the low price, depending on whether you are in a column of X’s or O’s, but not both. If the price movement is not significant enough, both prices are ignored. For the sake of our discussion here, we will use the high-low method.

Here are some general rules of thumb to consider when creating a point & figure chart using the high-low method.

When in a rising X-column:

  • Use the high price when another X can be drawn and then ignore the low price
  • Use the low price when another X cannot be drawn and the low triggers a three-box reversal
  • Ignore both the high and low prices when the high does not warrant a new X and the low does not trigger a three-box reversal

When in a falling O-column:

  • Use the low price when another O can be drawn and then ignore the high price
  • Use the high price when another O cannot be drawn and the high triggers a three-box reversal
  • Ignore both the low and high prices when the low does not warrant a new O and the high does not trigger a three-box reversal

Box Ranges

We also mentioned earlier that a box on a point & figure chart does not represent a singular price. Instead, a box represents a price range that depends on whether you are in a column of X’s or O’s. The range rises for a rising X-column and falls for a falling O-column.

For a rising X-column, a box marked with a 22 would range from 22 to 22.99 and a box with a 23 would range from 23 to 23.99. Prices would remain in the 22 box as long as they ranged from 22 to 22.99. If prices moved up to 23, a new X would be needed in the 23 box. Specifically, a price anywhere between 23 and 23.99 would warrant a new X.

If we were in a falling O-column, things would behave differently. A move to 22 would lead to an O in the 22 box. As long as the price ranged from 21.01 to 22, the O would remain. A price of 21 would then lead to a new O in the 21 box. To be exact, anything between 20.01 and 21 would warrant an O in the 21 box.

Constructing a P&F Chart: An Example

In order to better understand the mechanics of point & figure charting, it is useful to walk through the creation of an actual chart, using real-world data. When creating P&F charts, remember these key points:

  • X-columns represent rising prices (demand outstrips supply)
  • O-columns represent falling prices (supply outstrips demand)
  • Columns contain only X’s or O’s, not both
  • A change in column requires a price move equal to or greater than the reversal distance (box size × reversal amount)

Day Date High Low
1 12/1/2014 79.34 75.69
2 12/2/2014 80.71 78.10
3 12/3/2014 82.45 79.96
4 12/4/2014 82.23 81.14
5 12/5/2014 81.75 80.48
6 12/8/2014 79.50 75.79
7 12/9/2014 77.97 75.80
8 12/10/2014 76.24 74.36
9 12/11/2014 76.74 74.66
10 12/12/2014 75.71 73.35
11 12/15/2014 75.80 72.90
12 12/16/2014 76.51 72.32

 

For this example, we use the high-low method and the price data for Occidental Petroleum (OXY) from December 1 through December 16, 2014, which is provided in Table 2.

  • Day 1 High = 79.34; Low = 75.69: Like any type of chart, there needs to be a starting point. There is no right or wrong way to start your point & figure chart. We assume that prices are rising and plot X’s in the 75, 76, 77, 78 and 79 boxes. Since the 79 box ranges from 79 to 79.99, and this range includes the high price for Day 1, we stop there.
  • Day 2 High = 80.71; Low = 78.10: Since we are in a rising X-column, the first price we look at is the high for the day, which is 80.71. The previous day’s price took us to the 79 box (79 to 79.99), so we need to ask: Is the high for the day greater than or equal to 80? The answer is yes and so we add another X, in the same X-column, to the 80 box. Because another X was added, we ignore the low price for the day.
  • Day 3 High = 82.45; Low = 79.96: We are still in a rising X-column, so the first price we look at is the high for the day, which is 82.45. The previous day’s price took us to the 80 box (80 to 80.99), so we ask: Is the high for the day greater than or equal to 81? The answer is yes and so we add two new X’s up to the 82 box. Again, since we added more X’s, we ignore the low price for the day.
  • Day 4 High = 82.23; Low = 81.14: We are still in a rising X-column, so the first price we look at is the high for the day, which is 82.23. The previous day’s price took us to the 82 box (82 to 82.99), so we ask: Is the high for the day greater than or equal to 83? The answer is no. We then check to see if the low for the day is less than or equal to the current box value (82) minus the reversal amount or distance (3). Recall that we use using a three-box reversal and each box size is one, so the reversal amount is 3 × 1, or 3. The low for the day is 81.14, which is not lower than or equal to 79 (82 – 3). Therefore, a three-box reversal did not take place either, so we do not make any changes to the chart for this day.
  • Day 5 High = 81.75; Low = 80.48: We are still in a rising X-column, so the first price we look at is the high for the day, which is 81.75. The latest X movement took us to the 82 box (82 to 82.99), so we ask: Is the high for the day greater than or equal to 83? The answer is no. We then check to see if the low for the day is less than or equal to the current box value (82) minus the reversal amount or distance (3). The low for the day is 80.48, which is not lower than or equal to 79 (82 – 3). Therefore, a three-box reversal did not take place either, so we do not make any changes to the chart for this day.
  • Day 6 High = 79.50; Low = 75.79: We are still in a rising X-column, so the first price we look at is the high for the day, which is 79.50. The latest X movement took us to the 82 box (82 to 82.99), so we ask: Is the high for the day greater than or equal to 83? The answer is no. We then check to see if the low for the day is less than or equal to the current box value (82) minus the reversal amount or distance (3). The low for the day is 75.79, which is lower than or equal to 79 (82 – 3). Therefore, a three-box reversal did take place, so we shift right to a new column of O’s that begins one box below the highest X of the previous column and extends downward to 76, which covers the range of 75.01 to 76.

  • Day 7 High = 77.97; Low = 75.80: Having shifted to a falling O-column, we now first look at the low price of the day (75.80). The last O movement took us down to the 76 box (75.01 to 76), so we ask: Is the low for the day less than or equal to 75? The answer is no, so we do not add any new O’s to the column. We then see if the high for the day is greater than or equal to the current box value (76) plus the reversal distance (3). The high for the day is 77.97, which is not greater than 79 (76 + 3). Therefore, a three-box reversal did not place either, so we do not make any changes to the chart for this day.
  • Day 8 High = 76.24; Low = 74.36: We are currently in a falling O-column, so we first look at the low price of the day (76.24). The last O movement took us down to the 76 box (75.01 to 76), so we ask: Is the low for the day less than or equal to 75? The answer is yes, so we add one new O to the 75 box (74.01 to 75). Since we added a new O for this day, we ignore the day’s high price.
  • Day 9 High = 76.74; Low = 74.66: We are currently in a falling O-column, so we first look at the low price of the day (74.66). The last O movement took us down to the 75 box (74.01 to 75), so we ask: Is the low for the day less than or equal to 74? The answer is no, so we do not add any new O’s to the column. We then see if the high for the day is greater than or equal to the current box value (75) plus the reversal distance (3). The high for the day is 76.74, which is not greater than 78 (75 + 3). Therefore, a three-box reversal did not place either, so we do not make any changes to the chart for this day.
  • Day 10 High = 75.71; Low = 73.35: We are currently in a falling O-column, so we first look at the low price of the day (73.35). The last O movement took us down to the 75 box (74.01 to 75), so we ask: Is the low for the day less than or equal to 74? The answer is yes, so we add a new O to the 74 box (73.01 to 74). Since we added a new O for the day, we ignore the day’s high price.
  • Day 11 High = 75.80; Low = 72.90: We are currently in a falling O-column, so we first look at the low price of the day (72.90). The last O movement took us down to the 74 box (73.01 to 74), so we ask: Is the low for the day less than or equal to 73? The answer is yes, so we add a new O to the 73 box (72.01 to 73). Since we added a new O for the day, we ignore the day’s high price.
  • Day 12 High = 77.97; Low = 75.80: We are currently in a falling O-column, so we first look at the low price of the day (75.80). The last O movement took us to the 73 box (72.01 to 73), so we ask: Is the low for the day less than or equal to 72? The answer is no. We then check to see if the high for the day is greater than or equal to the current box value (73) plus the reversal amount or distance (3). The high for the day is 77.97, which is higher than or equal to 76 (73 + 3). Therefore, a three-box reversal did take place, so we shift right to a new column of X’s that begins one box above the lowest X of the previous column and extends upward to 77, which covers the range of 77.01 to 78.

The point & figure chart using the high-low data for Occidental Petroleum for the period December 1 to December 16, 2014, is shown in Figure 3.

P&F Chart Analysis

I prefer point & figure charts because I find them easier to analyze compared to bar or candlestick charts. Two things I look for when examining a point & figure chart are:

  • Support & resistance levels
  • Trendlines (up and down)

Figures 4 and 5 illustrate the support/resistance and trendline concepts we discuss below.

Support

Support is the price level where demand is thought to be strong enough to prevent the prices from moving lower. Support levels are easy to spot on P&F charts. In particular, a sequence of O-columns with equal lows marks a clear support level.

Resistance

Resistance is the price level at which selling is thought to be strong enough to prevent prices from moving higher. Resistance levels are also easy to spot on P&F charts. In particular, a sequence of X-columns with equal highs marks a clear resistance level.

Trendlines

An upward sloping trendline is a bullish support line, while a downward sloping trendline is a bearish resistance line. Bullish support lines slope up at 45 degrees and start from an important low. At a minimum, it takes an X-O column sequence of 5-3-5-3-5-3 to produce an advance steep enough to maintain this angle. X-columns need to be at least five boxes, with O-columns a maximum of three boxes. An X-column greater than five would allow for an O-column greater than three.

Bearish resistance lines slope down at 135 degrees and start from an important high. A similar ratio is needed to maintain the slope of a bearish resistance line. An O-X column sequence of 5-3-5-3-5-3 is needed to maintain the slope. O-columns need to be at least five boxes. with X-columns a maximum of three boxes. An O-column greater than five would allow for an X-column greater than three.

 

Conclusion

Point & figure charts give investors a unique perspective when viewing price activity. By eliminating time from the equation and focusing only on “significant” price movements, they allow investors to focus on the interaction between the supply and demand of a given security, the driving force behind security prices. Furthermore, point & figure charts more clearly illustrate such analysis concepts as support and resistance levels and upward and downward trendlines. All of these features make them especially useful for investors, no matter if you are a seasoned technician or an avowed fundamental investor.


Discussion

Ronald Schwechter from IL posted over 2 years ago:

I took an adult education course on P&F Charting and read books on it. As pointed out in this excellent article, it is an ideal "reality check" for fundamental investors, to spot trends and measure demand visually.

I personally use fundamental and technical analysis, which must support each other, before I place a trade.


James Young from MT posted over 2 years ago:

nice explanation and example


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