Point and figure charts

Point and figure charting is another type of stock charting that's been around so long it deserves a mention when covering methods of charting. A point and figure chart is composed of x's and o's drawn on a sheet of graph paper. This chart isn't constructed using a set time frame but is instead based on reversals of price. The x's make up a series of up moves without a certain price reversal, while the o's represent a series of down moves without a price reversal.

Figure 2-8 is a point and figure depiction of the same data that composes the line and bar charts in the two previous sections. The figure values each square with one point and adds a new column with a change of direction of at least two points, based on the close. For example, if day one has a closing price of 75 and day two has a closing price of 78, you draw x's from 75 to 78. If on day three the closing price is 76 — a 2-point reversal — a new column is added, and o's are placed in the 77 and 76 squares. If the price stays in the 76 to 77 range for a few days, no changes are made to the chart.

Point and figure charts are unique because they purely reflect price moves. Because time isn't factored in, you don't need to update the chart if a stock stays at a certain price for some time. On the other hand, when a price trades between two prices several times — bouncing between 50 and 55, for example — a point and figure chart offers a very clear display of those levels, which are called support levels and resistance levels. In this case, 50 is the support level and 55 is the resistance level.

If you can properly recognize support and resistance levels, you can potentially use that knowledge to make a tidy profit. Using the example in the preceding graph, if you can buy at 50 and sell at 55 several times over, the returns can be astounding. So why aren't point and figure charts right up there with candlesticks in terms of usefulness? It's simple: Support and resistance levels show up well on candlestick charts too, and candlesticks also contain a variety of other information.

Although interesting and unique, point and figure charting is really a throwback to a time when stock prices were charted based on the closing prices found daily in the financial press and were meticulously kept by hand. Its use has fallen by the wayside with the advent of technology.

Figure 2-8:

A point and figure chart.

Figure 2-8:

A point and figure chart.

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