What is a point and figure (P&F) graph?
A point and figure graph plots the price movements of stocks, bonds, commodities or futures without taking into account the passage of time.
Unlike some other types of charts, such as candlesticks, which mark the degree of movement of an asset over defined time periods, P&F charts use columns made up of stacked X or O, each representing a defined amount of price movement. The Xs represent the rise in prices, while the Bones represent a fall in prices.
Technical analysts always use concepts such as support and resistance, as well as other models, when viewing P&F charts. Some argue that support and resistance levels, as well as breakouts, are more clearly defined on a P&F chart because it filters out tiny price movements and is less sensitive to false breaks.
Key points to remember
- An X is created when the price increases by a defined amount, called the size of the box. An O is created when the price drops the amount of the box size.
- The X’s and Bones stack on top of each other, respectively, and often form a series of X’s or O’s.
- The size of the box is defined according to the price of the asset and the preference of the investor.
- For the price to reverse, resulting in the formation of a new column of Xs after Os or of a new column of Os after Xs, the price must be reversed by the amount of the cancellation.
How to calculate point and figure graphs (P&F)
Dot and figure charts do not require calculation, but they do require at least two variables to be defined.
One variable is the size of the box. The size of the box can be a specific amount, such as $ 1, a percentage, such as 3% of the current price, or it can be based on a true true range (ATR), which means that the size of the box will fluctuate with volatility.
The amount of the cancellation must also be defined. The amount of the cancellation is usually three times the size of the box. For example, if the box size is $ 1, the cancellation amount is $ 3. The reversal can be set to anything the trader wants, such as once the size of the box or 5.5 times the size of the box.
An optional variable is whether to use high and low prices for the underlying asset, or to use closing prices. Using high and low prices will mean creating more X’s and Bones, while using closing prices only (less calculated movement relative to highs and lows) will mean less X’s and Bones created.
What does a P&F graph tell you?
Point and figure charts often provide technical analysts with different trade and trend signals, compared to traditional candlestick or bar charts. While some analysts rely more on dot and figure charts, others use these charts to confirm the signals provided by traditional charts in order to avoid false breaks.
The key to graphing is the box size or the amount of price movement that determines whether a new X or O is added to the graph. For example, suppose the size of the box is $ 3. If the last X arrived at a price of $ 15, a new one is added to the current column of X when the price goes up to $ 18.
In particular, the line of X continues in the same column provided that the price continues to increase and does not reach a predetermined amount of inversion, in which case a new column of O begins.
The same goes for a column of Bones in a declining market; the column continues until the stock reaches the amount of the reversal, at which point a new column of X begins.
A rollover occurs when the price no longer moves enough to place another X or O in the current X or O column, then the price moves at least three box sizes (if this is the chosen rollover amount) to the opposite direction. When an inversion occurs, several X or O will be drawn at the same time. For example, following a price increase or an X column, if an inversion occurs and the amount of the inversion is three box sizes, when the inversion occurs, three Os will be drawn starting at a place below the highest X.
Traders use P&F charts similarly to other charts. Traders always monitor support and resistance levels. Escapes can signal major trend changes. Depending on the size of the box, the columns themselves can represent important trends, and when the column changes (from O to X, or X to O), this can signal a significant trend reversal or withdrawal.
Charles Dow, founder of The Wall Street newspaper, is recognized for having developed point mapping as a means of determining imbalances between supply and demand.
One of the main technical analysts specializing in point and figure graphing is Tom Dorsey, who founded the research firm Dorsey, Wright & Associates in 1987. He is the author of several books on the subject, including Spot graphics: the essential application for forecasting and monitoring market prices. Nasdaq purchased Dorsey, Wright & Associates in 2020.
Dorsey has helped popularize the use of point and number charts with more traditional technical indicators, such as moving averages, relative strength and lead / decline lines.
The difference between point charts (P&F) and Renko
Renko graphics are also based on the size of the box, and when the price varies depending on the size of the box, it creates a brick up or down that moves at a 45 degree angle to the brick previous. Renko cards never have bricks side by side. Therefore, a reversal occurs if the price moves in the opposite direction of two amounts.
The main difference between the types of graphics is the appearance. P&F charts are side-by-side columns of X and O, while a renko chart is created by a series of boxes spread over time at 45-degree angles.
Limitations of Using Point-and-Figure Charts (P&F)
P&F charts can be slow to react to price changes. An escape, for example, must move the upright of the box to signal that an escape has occurred. This may benefit some traders as it can reduce false breakout signals, but the price has already moved the amount of the box (or more) past the breakpoint. For some traders, receiving the signal after the price has already moved may not be effective.
Additionally, while P&F charts can help reduce the number of false breaks, false breaks still occur. What appears to be an escape can still be reversed soon after.
P&F charts are good for keeping traders in strong trends, as many small counter trend movements are filtered out. However, when a reversal occurs, it can significantly wipe out the profits or cause big losses. Because the amount of the inversion is usually so large, if a trader only uses P&F charts, he will not see the inversion until the price has moved significantly against him.
When using P&F charts, it is recommended that you also monitor the actual price of the asset so that risk can be monitored in real time. This can be done by monitoring a candlestick or an open-up-down-closed chart (OHLC).