Tips on Technicals - Point and Figure
| Indicator type: |
Display |
| Used to: |
Graphically illustrate price action |
| Markets: |
All cash and futures, not options |
| Works Best: |
All markets in tick time frame. Equities traders sometimes use the daily format. |
| Formula: |
N/A |
| Parameters: |
The components of the chart are the box and the reversal. A box contains a user designated number of change units. Most markets use a 1 box and 3 reversal. Forex and cash indices trading in .001 or .0001 units might use a 10 or 100 box. US Equities traders often use a $1 box which translates into an 8 box (8 eighths). |
| Theory: |
Point and Figure plots price changes only, without regard to time, through a user defined filter. This filter removes price "wiggles" (volatility) and can be adjusted for maximum or minimum sensitivity. Trend line analysis is commonly applied. |
| Interpretation: |
If prices are rising, the boxes are designated by the letter "X." If prices are falling, boxes are designated by the letter "O." Columns of "X" and "O" are built as the market trades higher and lower, respectively. For a rising market, each time price trade up to the next box level, an "X" is added to the current column of "Xs." A reversal occurs when prices fall by a user defined number of boxes.
A "1 by 3" set for bonds would mean a box size of 1/32 and a reversal of 3/32. A "2 by 10" could mean a 2/32 box and a 10/32 reversal or a 2/32 box and a 20/32 reversal, depending on the conventions of the charting software, if any, being used.
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In Figure 1, the box size is two and the reversal size is four so Knight-Ridder stock must trade lower (from the top of the column of "X") by 1 full point (2 tick box by 4 box reversal equals $1. When a reversal occurs, a new column of letters is started to the right of the current column. In this example, a column of "Os" will be added.
The larger the reversal, the less likely the analysis will be affected by whipsaws and volatility. The smaller the reversal, the more sensitive and detailed it will be. Since point and figure is calculated from tick data, a medium to long-term analysis will be better using a larger reversal and a short-term analysis will be better using a smaller reversal. Point and Figure can also be calculated using daily data and this is usually done for long-term analysis since the intraday reversals are lost.
Point and Figure charts are analyzed like bar charts. Figure 2 shows the February 1994 COMEX Gold contract in a tick chart and Figure 3 shows the same data set in a 1 by 5 point and figure chart. The general shapes are the same but there are two flat and wide zones at 375 and 377 in the latter. What was not readily visible in the tick chart was two small periods of high volatility, indicated by several reversals in succession. The wider the point and figure pattern, the more significant it becomes. In this case, the 375 area provided strong intraday support and the 377 area showed a strong resistance to the rally. These two zones are labeled in both charts as "A" and "B" respectively.
