How to Trade Using Point & Figure Charts
Original post by Jonathan Langsdorf of Demand Media
Point and figure charting is a very different style of price chart compared to the commonly used bar and candlestick charts. This chart type is not time based. The chart only tracks price movement. Point and figure charts only plot price trends and reduce the effects of small price fluctuations. Use a trading software with point and figure charts to find possible breakout patterns or to allow you to ride a price trend without pulling out due to small price reversals.
Set the parameters for point and figure charts in your charting software. The parameters for this chart type are the size of each box and the number of boxes before a price reversal is charted. A new box is not filled until the price has moved by the designated box amount. Box size is dependent on the market you are trading. For stocks, start with $1.00, Forex trading works with 10 pips and 5 to 10 ticks for futures, depending on the futures contract. A setting of 3 is a common starting point for reversals.
Review the recent price history on the point and figure chart to understand how the chart works. The chart builds price trends in columns. Uptrends are indicated by a column of X's and downtrends will be the columns with O's. With a reversal setting of 3, a price trend will not reverse until there would be two boxes filled in the opposite direction.
Look for the point and figure patterns that indicate trading opportunities. This chart will plainly show price breakouts in either direction. A horizontal resistance level occurs when columns stop at the same level several times then reverse. A breakout has occurred when the current column prints a box above or below the boxes at the resistance level. Point and figure boxes can also set up a diagonal resistance level and an entry signal is generated when one column breaks above or below the diagonal in the opposite direction.
Use the signals from the point a figure chart to develop your own set of rules for entry, stop loss and exit trades. One building column of a point and figure chart is an ongoing trend with a definite indication of price reversal when a new column starts in the opposite direction.
Tips & Warnings
- The point and figure chart has no time reference. A new, filled box may fill minutes after the last then take hours to print the next box.
- Try point and figure trading on a practice money account before using real money. Adjust the box size until the chart consistently gives good trend indications with few false breakout indications.
- Trading software
- FX Path; Learn Forex -- Forex Point and Figure Trading; July 2010
- Stockcharts.com: Point and Figure Chart Basics
- Incredible Charts: Point and Figure Chart Patterns
About the Author
Jonathan Langsdorf has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Langsdorf has a bachelor's degree in mathematics from the U.S. Air Force Academy.