Point and Figure Charts

Why you should be using them

European Conference 2007 London, 7th February

Jeremy du Plessis CMT, FSTA

Head of Technical Analysis, Updata plc www.updata.co.uk

Reasons to use P&F Charts

Voice of the Market
Only move when market moves

Unambiguous signals Objective trend definition Multiple time horizons from same data Objective price targets & risk-reward ratios Better for Relative Strength analysis Ideal for scanning of stock universes

Point and Figure Chart

What is a Point & Figure chart?

Typically (not always) constructed with Xs and Os
Xs represent up movements Os represent down movements

Price is scaled on the vertical Y-axis No time scale along the horizontal X-axis
Time not part of construction or analysis

X and O represents a price interval - Box Size

Price changes below the box size are ignored

Column changes determined by Reversal Size

Where did they come from?

Started off as a price recording mechanism and became a charting method

How?

Where did they come from?

19 Century Floor traders wrote prices down as stock traded

th

(including fractions)
8 9 11 12 12 13 15 15 16 16 15 13 12 11 14 15 16 17 19 20 21 19 18 19

Where did they come from? But realised that fractions didnt add anything. So removed fractions
8 9 11 12 12 13 15 15 16 16 15 13 12 10 10 11 11 14 15 16 17 19 20 21 19 18 19 20 20 21 23

First tenet of Point and Figure established

Where did they come from? After a Busy Trading Day

8 9 11 12 12 13 15 15 16 16 15 13 12 10 10 11 11 14 15 16, 17 19 20 21 19 18 19 20 20 21 23 21 22 23 22 20 19 18 17 18 19 19 18 19 19 20 21 22 23 21 22 20 21 19 18 17 16 18 17 16 18 19 19 18 17 18 19 19 20 21 21 22 22 21 21 22 23 18 19 19 18 19 19 20 21 22 23 21 22 20 21 19 18 17 16 18 18 19 19 18 19 19 20 21 22 23 21 22 20 21 19 18 17 16 18

Difficult to make any sense

Where did they come from?

Realised columns would be easier and more informative
14 13 12 11 10 9 16 15 14 13 13 12 12 11 11 10

Where did they come from? Started to notice patterns in the data
23 22 21 21 20 20 20 19 19 19 18 18 17 16 15 14 13 12 11

16 15 14 13 12 11 10 9 8

15 14 13 12 11 10

Where did they come from? Price record becomes a Figure Chart
23 22 21 21 20 20 20 19 19 19 18 18 17 16 15 14 13 12 11

16 15 14 13 12 11 10 9 8

15 14 13 12 11 10

Where did they come from? Figure chart becomes a Point Chart
20 X X X X 0 0 0 X X X X X X X 5 X X X X

15

10

X 5 X X X X 0 X X

5 X X X X 0

Where did they come from?

Traders referred to their point charts and their figure charts as their.

Point and Figure charts!

And so Point and Figure was born

Where did they come from? Modern Point and Figure chart
20 X X X X X O X X O X X O X X X X X X X

15

10

X X X X X X X X X

O O O O O O

Various Construction Methods

Column Reversals
1-box original method 3-box most popular

Data required
Tick plot each price original method
Too much data for longer term analysis

Daily - using Close or High/Low

Ideal for longer-term analysis

Intraday using 60min, 1min close or high/low

Ideal for shorter-term

Unambiguous Signals
All 3-box P&F signals based on Double-top and double-bottom break
(1-box patterns are more complex)
X X X X O X X O X X O X Buy O O X O O X O O X O O O O

Sell

The wider the pattern the stronger it is

Unambiguous Signals
Triple-top and triple-bottom break
X X X X X O X O X X O X O X X O O X Buy O O X X O X O X O O X O X O O O O O

Sell

Unambiguous Signals
Signals are unambiguous.
BUT not every signal should be taken

Signals put you in the right frame of mind Point and Figure analysts
Look left for Support or Resistance Look left to see if it is part of a bigger pattern Look for common Point and Figure patterns

Use the Trend lines to confirm or reject signals

Point and Figure Trend lines

Trend lines vital for Point and Figure analysis Two ways to draw Trendlines:
Subjective
Lines can placed subjectively to show trend

Objective advantage of Point and Figure charts

Lines drawn at 45 from tops and bottoms
45 = one box up/down, one column across Defines bull and bear trends

45 Trend Lines Nasdaq

45 Trend Lines Nikkei 225

45 Trend Lines S&P500

45 Trend Lines FTSE 100

45 Trend Lines FTSE 100

Add Subjective Trend Lines ?

Or better to add 45 Internals

Trends & Internals - DJ Stoxx

Trends & Internals on Oil

Trends & Internals EURO

Advantages of 45 Trend Lines

Can be drawn immediately after top/bottom Objective - cant argue with them They alternate and carve up the chart Easy to see bullish and bearish sections Add dimension to the chart Help accept or reject Point & Figure signals Can see the trend easily

Uptrend or Downtrend?

Are you sure?

Point and Figure Scaling In Point and Figure terms:

Arithmetic: Log: Fixed points box size Percentage Box Size

Arithmetic Chart - Vodafone

Log Scale Chart - Vodafone

Log or Arithmetic?
Log better: For medium and long-term analysis Where large rise and fall Where rise has been exponential

Arithmetic better: For linear price rises For charts in a price range (e.g. Bonds) Essential for intraday charts especially tick charts Essential for Forex

Multiple Time Horizons

Changing the Box Size changes the Sensitivity Changing Sensitivity changes the Time Horizon Obtain Short, Medium and Long-term view from same data Log scale % boxes ideal for this

2% Box = Long-term View

1% Box = Medium-term View

0.5% Box = Short-term View

EURO Daily - 100pip

EURUSD Daily - 50pip

EURUSD Daily - 25pip

EURUSD Daily - 10pip

EURUSD Hourly 10pip

Objective Price Targets

Unambiguous way to obtain targets
Two Methods:
Vertical Count - based on thrust off low or high Horizontal Count - based on pattern width

Unambiguous does not imply accuracy Targets and trends go together Achieved and unachieved targets tell you
Trend strength/weakness Warn of trend deterioration

Vertical Targets - NASDAQ

Vertical Targets - NASDAQ

Vertical Targets - NASDAQ

Vertical Targets - NASDAQ

Vertical Targets - NASDAQ

Vertical Targets - NASDAQ

Vertical & Horizontal - S&P 500

Vertical & Horizontal - S&P 500

Vertical & Horizontal - S&P 500

Vertical Targets Cable 100pip

Vertical & Horizontal Oil

Objective Risk-Reward Ratios

Point and Figure gives you:
Reward = Target entry price
and

Risk = entry price exit price

Risk-Reward ratio = Reward / Risk Helps you decide

Whether to take the trade What Stop level to use
Either: Point and Figure signal as Stop Or: % Trailing Stop

Risk-reward ratio at signal

Risk-reward ratio after signal

Risk-reward at triple-top signal

Risk-reward ratio - new target

Risk-reward ratios NOW

Risk-reward ratio at Signal

Risk-reward ratio NOW

Better Relative Strength charts

What is Relative Strength?

Ratio chart
Usually share price divided by index

Best to Normalise the Ratio

How? Why? Whats the Advantage?

Rising chart = share outperforming Falling chart = share underperforming Essential for good fund management
Buy/hold outperformers Sell underperformers

Why P&F of Relative Strength?

Same advantages as price charts
Clear signals Objective trend lines Objective targets

R/S HSBC / UKX

R/S Maersk / SXXP in Euros

R/S UBS / SXXP in Euros

R/S BMW / SXXP

Ideal for finding Opportunities

Clear-cut signals make Point & Figure ideal for scanning
Scan your universe of stocks:
P&F buy signals and/or P&F sell signals and Risk Reward ratio greater than 2.5 and Trend is up/down

Best to use two time horizons 1% & 0.5% Add Relative Strength with same box sizes

So what should you do now?

So what should you do now?

Start using Point and Figure in your analysis Include a P&F chart in your report Log or Arithmetic depending on the term Consider drawing them with Xs only Add 45 trend lines for support/resistance Consider using moving averages Add a few targets Explain what the chart means

FTSE Chart for your report

Try Moving Averages instead

And if you really want to ....

Include some Fibonacci Extensions or Retracments

FTSE with Fib. extensions

Look at a different perspective

The result is..

Your analysis will stand out from the crowd !

Email: Jeremy@Updata.co.uk