Point and figure charting
With the continual improvements of computers and software packages, technical analysis of charts has become common place. The range of packages available are many and so are the varying techniques used. One of the more popular styles of technical analysis prior to the wide acceptance of the PC was the Point and Figure charting technique. Armed with nothing more than a pencil, some graph paper and the daily prices on stocks, the trader was able to vigilantly apply Point and Figure analysis to the charts. The introduction of the PC saw the popularity of Point and Figure process wane over the years, however there has been an increasing interest in it use of recent. In today's lesson we will be looking briefly at this technique.
By providing a slightly different perspective, the Point and Figure chart offers an alternative viewpoint to the more common bar or candlestick chart. At a glance, the Point and Figure charts provides the viewer with clearly recognisable resistance, support and trend lines. Importantly, this method also removes the variable of time from its equation.
The Basics
The chart has columns of X's or O's.
'X' - symbolise the share price is rising and,
'O' - indicates that the share price is falling.
The columns can only contain one or the other letter ONLY.
Pre-determined Variables
There are two other pre-determined variables that you need before you can use this technique. They are the:
This is the amount a share price has to move before an 'X' is added on top of a column, and conversely before an 'O' is added below a column. The Box Size is dependent on the share price. For instance a stock between $5.01 and $20.00, traditionally has a Box Size of $0.50. That is, if the share price has a high $2.00 above the previous high the column will contain a of 4 X's (four individual $0.50 moves).
The Reversal Amount is the pre-determined amount the share price must reverse before the commencement of a new column. The Reversal Amount is usually 3 times the Box Size. Using the $0.50 box size, a reversal of $1.50 in the share price direction to the previous day is required.
That is, if the share price has been steadily increasing, there would be a column of X's. The share price would need to drop $1.50 in one time period (one day) before the commencement of a new column of 'O's.
It should be pointed out that sometimes when the highs and lows of a share price are within the previous days range there will be nothing added to the chart.