In this guide to understanding Point and Figure Charting, we’ll show you what this chart looks like, explain its components, and teach you how to interpret it.
What Is Point and Figure Charting?
Point and Figure Charting reduces the importance of time on a chart and instead focuses on price movements.
Point and Figure charts are made up of Xs and Os. The Xs are new highs and the Os are new lows.
The strength of Point and Figure charting is that it eliminates the element of time and focuses on price.
Inputs For a Point and Figure Chart
There are two inputs to a Point and Figure chart:
- Box size
- Reversal amount.
Let’s look at these inputs in more detail.
The box size is the size of movement required to add an X or an O.
For example, a stock at a price of $20 may have a box size of $1. This means that an increase from $20.01 to a high of $21.34 means another X is added.
If the high price only increased to $20.99, then another X is not added because the stock didn’t close another box size ($1) more.
The reversal amount is the size of reversal before another column is added to a Point and Figure chart.
To illustrate, if the reversal amount is $3, then the $20 stock would have to fall down to $17 before a new column (in this example of Os) would be started.
How to Use a Point and Figure Chart
One of the main uses for Point and Figure charts, and the one emphasized in this section, is that Point and Figure charts make it easier for traders to see classic chart patterns.
Seeing Support and Resistance Lines
Seeing the Double Bottom Pattern
Chart 2 above illustrates the two bottoms of the double bottom pattern, as well as the pierced confirmation line, resulting in a potential buying opportunity.
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