What is a Point-and-Figure (P&F) Chart?
A Point-and-Figure (P&F) chart documents price movements for stocks, bonds, commodities, or futures, without considering the passage of time. Contrary to other types of charts, such as candlesticks, P&F charts employ columns consisting of stacked X’s and O’s. X’s signify rising prices, while O’s indicate falling prices.
Technical analysts still utilize concepts like support and resistance, as well as pattern recognition when studying P&F charts. Many believe support and resistance levels—and breakouts—are better defined on a P&F chart, as it eliminates minor price fluctuations and reduces false breakout signals.
Key Concepts of P&F Charts
- Box Size: An X is created when the price moves higher by a set amount, called the box size. Conversely, an O is created when the price drops by the box size amount.
- Columns of X’s and O’s: These stack vertically, often forming a series of X’s or O’s that indicate sustained price movement.
- Reversal Amount: A new column of X’s or O’s appears when the price moves contrary to its current trend, surpassing the reversal amount, usually set as a multiple of the box size.
Calculating Point-and-Figure (P&F) Charts
Though no calculation is needed, P&F charts necessitate setting at least two variables—the box size and the reversal amount.
- Box Size: This can be a specific dollar amount, percentage of the current price, or based on the average true range (ATR), thus fluctuating with volatility.
- Reversal Amount: Typically three times the box size, but traders can set it to any other preferred multiple.
- Price Selection: Investors may choose to use high and low prices, which create more X’s and O’s, or closing prices, which result in fewer entries.
Interpreting Point-and-Figure (P&F) Charts
P&F charts offer distinct trade and trend signals compared to traditional charts. While some analysts rely on them exclusively, others use P&F charts in tandem with traditional ones to confirm signals and avoid false breakouts.
The box size plays a pivotal role in P&F charting. For instance, if the box size is set at $3 and the last X was at $15, a new X would be added when the price hits $18, thus building a column. This continues until a reversal amount is breached, prompting the start of a new column of O’s.
A similar principle applies to O’s in declining markets. Reversals occur when less movement prompts a new X or O, marking a shift in direction significantly by the reversal amount.
Traders employ P&F charts akin to other chart types. They identify support and resistance levels for major movements and breakouts while interpreting column shifts as potential trend changes.
Pioneers in Point-and-Figure (P&F) Charting
Charles Dow
Charles Dow, founder of The Wall Street Journal, is credited with developing point-and-figure charting to identify demand and supply imbalances.
Tom Dorsey
Tom Dorsey popularized P&F charting and founded Dorsey, Wright & Associates in 1987. He integrated traditional technical indicators with P&F charts. Nasdaq acquired his firm in 2015.
P&F vs Renko Charts
Renko Charts similarly use box size movements but create bricks arranged at 45-degree angles, avoiding adjacent placement. A Reversal in Renko charts requires two box-size movements contrary to the previous direction. Visually, P&F charts compose columns of X’s and O’s, while Renko represents boxes at angles over time.
Constraints of Point-and-Figure (P&F) Charts
Reaction Time
P&F charts can be sluggish to price changes due to the need for confirmation beyond the box size, possibly missing early breakout signals.
### Monitoring
Although they filter minor movements, traders should monitor the asset’s actual price to manage risks effectively.
### False Signals
While good at capturing trends, P&F charts are not immune to false breakout signals and can lead to substantial losses upon a reversal due to their inherent lag.
Leveraging additional chart types like candlesticks or OHLC charts alongside P&F can provide real-time insights into liquidity and price movements.
Related Terms: Candlestick Charts, Breakouts, Price Movements, Technical Indicators, Renko Charts.
References
- Nasdaq. “Point & Figure Basics”, Page 2.
- Nasdaq. “Tom Dorsey”.
