Point and Figure Charting
Point & Figure ("P&F") charts differ from traditional price charts in that they completely disregard the passage of time and only display changes in prices. Rather than having price on the y-axis and time on the x-axis, P&F charts display price changes on both axes. This is similar to Kagi, Renko, and Three Line Break charts.
Interpretation
Point & Figure charts display the underlying supply and demand of prices. A column of Xs shows that demand is exceeding supply (a rally); a column of Os shows that supply is exceeding demand (a decline); and a series of short columns shows that supply and demand are relatively equal.
There are several chart patterns that regularly appear in P&F charts. These include Double Tops and Bottoms, Bullish and Bearish Signal formations, Bullish and Bearish Symmetrical Triangles, Triple Tops and Bottoms, etc. It is beyond the scope of this article to fully explain all of these patterns.
* Example
In the two charts below, we have outlined how Point and Figure charts are displayed in relation to bar charts. For this example, we’ll use General Motors.
As mentioned, Point and Figure charts disregard the aspect of time in the building of the X’s and O’s. In the chart below, we can see how the price action behaved as it broke through the column of X’s near the $40 level. Once this level was broken, the price action begins to fluctuate within the new range of $36 and $54. As we can also see, the price action came down upon the support level at $40 and subsequently broke through thereby establishing a new trading range.
Calculation
Point & Figure charts display an "X" when prices rise by the "box size" (a value you specify) and display an "O" when prices fall by the box size. Note that no Xs or Os are drawn if prices rise or fall by an amount that is less than the box size.
Each column can contain either Xs or Os, but never both. In order to change columns (e.g., from an X column to an O column), prices must reverse by the "reversal amount" (another value you specify) multiplied by the box size. For example, if the box size is three points and the reversal amount is two boxes, then prices must reverse direction six points (three multiplied by two) in order to change columns. If you are in a column of Xs, the price must fall six points to change to a column of Os. If you are in a column of Os, the price must rise six points to change to a column of Xs.
The changing of columns identifies a change in the trend of prices. When a new column of Xs appears, it shows that prices are rallying higher. When a new column of Os appears, it shows that prices are moving lower.
Because prices must reverse direction by the reversal amount, the minimum number of Xs or Os that can appear in a column is equal to the "reversal amount."
The common practice is to use the high and low prices (not just the close) to decide if prices have changed enough to display a new box.
Format
eSignal uses decimalization instead of non-decimal numbers for Point & Figure box sizes. This may cause confusion if you were using a different data provider such as CQG as they do not use decimals but instead whole numbers. Here's an example: 400 Box size and a 3 reversal will be written in eSignal as 4 Box size with a 3 reversal. Likewise, if someone wanted a half-point size it will be 0.5 in eSignal but 50 in CQG. eSignal has a number of additional options for how the PnF reversal is calculated. The most common is High/Low (new in 7.9) which is generally the only option offered by other vendors. Right click your chart and go to ‘Edit Studies’ to ensure that the Point & Figure source is set at "High/Low" instead of one of the others, if you are attempting to match up with other vendors.