A point and figure
chart depicts price versus movement, and is an
excellent means to study how the market moves
through different price levels.
A point and figure
chart is calculated. in the following way.
1. Determine the size of a
box. A box may contain either an X, which represents a
price moving up, or an O, which represents a price
moving down. The smallest box would be the minimum price
change possible for the future, which is one tick. For
example, one tick in the NYSE future is 5 points,
therefore the minimum increment is 5 points or some
multiple of 5, such as 10, 15, and so on. If the German
mark were used, the minimum tick would be 1 and any
Integral number could be used such as 2, 3, or 13.
Determining the size
of the box is similar to determining the time frame
in a bar chart, such as a minute, daily, or weekly.
A smaller box size, such as ten, in the NYSE will
show more movement but also a lot more noise in the
market, and not be appropriate for long-term
trading. A larger box size will show the more
significant moves, but does not show many of the
short-term support and resistance points helpful for
short-term trading.
2. Determine the
minimum price reversal for the market. The minimum
price reversal is the number of boxes required to
change the vertical column from an X to an O, or
vice versa. The commonly accepted number is a three
box reversal, but other forms may be used too. If a
three box reversal is used, and the box size is
five, the minimum reversal must be 15 (three boxes
times five).
3. The chart is
started by recording the first minimum reversal move
up or down. An upward move by the minimum reversal
size is denoted by an X, and a downward move by the
minimum reversal size is denoted by an O. A move
that continues in the same direction is recorded
with an X or an O until a minimum reversal occurs.
The reversals are recorded independently of time.
The
minimum box size stated here is a 10-point move (0.10 on
the graph), and the minimum reversal is 30 points (0.30
on the graph), or three boxes. One tick, or the minimum
movement on the NYSE contract, is five points, so a
2-tick move is necessary for a box. This would be an
example of a short-term chart similar to a 30- to
6O-minute bar chart.
The
chart is drawn as follows:
The
market opens at 98.50 and rallies to 98.80 which is a
.30 move so 3 X's are recorded. The market then drops
from 98.80 to 98.60 but this is not enough for a minimum
reversal. It rallies to 98.90 and then to a high of
99.05 so X's are drawn to 99.00 to show the continuation
of the move up. No X is drawn at 99.10 because the
market must actually trade at 99.10 to record
an X.
On
the next day, the market opens down at 97.00 and sells
off to 96.85, so an 0 is recorded at 97.00 and 96.90.
Again, the market must trade to 96.80 to record an 0 at
98.80. It then rallies to 97.10, and finally reaches
97.20, which is enough for a minimum reversal of 0.30
points so three X's are drawn to 97.20.
Point
and figure chart formations can be traded just like time
charts. Each market will have various box sizes,
depending on the volatility of the market and the time
frame of the trader. The more volatile the market and
the longer the time frame of the trader, the larger the
box size.
Point and Figure Charting
Overview
