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Understanding Point & Figure Charts Part I of IV

This is a discussion on Understanding Point & Figure Charts Part I of IV within the Trading Systems forums, part of the Trading Forum category; Talking Points: -The History of Point & Figure Charts -Why Traders Use Point & Figure Charts -The Construction of Point ...

          
   
  1. #1
    Senior Member ForeCastle's Avatar
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    Understanding Point & Figure Charts Part I of IV

    Talking Points:
    -The History of Point & Figure Charts
    -Why Traders Use Point & Figure Charts
    -The Construction of Point & Figure Charts

    The Point & Figure or P&F charts are unique to every other chart you’ve likely used. This article will get you comfortable with the charting technique that is over 100 years old. Similar to Japanese Candlesticks, the Point & Figure charts have stood the test of time as they make recognizing congestion or trend breakouts easy.

    The History of Point & Figure Charts

    Unlike other charting methods, there is no one person credited for creating Point & Figure charts. Before computers, Point & Figures were adapted from a method used by floor traders in the 19th and pre-computer 20th century. The basic premise that caused P&F to be born is that there needed to be a simple method for floor traders to record price action to analyze price without unnecessary noise. Over a handful of years, two charts converged into one type of chart known as Point & Figure Charts.

    Learn Forex: Point Charts vs. Figure Charts




    To make sense of the far-right chart above, it may be helpful to know what creates a new column which will be explained in detail later in the article. The chart on the right requires a reversal of 3 boxes of $1 each or $3 move against the prior trend to print a new column. As you can see, instead of price being printed, a column of X’s or O’s will occupy the chart.

    The first method on the left was simply recording prices up and down without fractions which, you can imagine would become mind-numbing overtime. To make analysis less tedious and thus trading easier, a point chart above was constructed with price marked once on the y-axis and then marked an “X” or “point” for either direction when any whole figure was crosses. The Forex equivalent of this would be an Average True Range equivalent or 1XATR or 100 Pips.

    How To Add Point & Figure to Marketscope 2.0

    If you’re yet to utilize Point & Figure charts on FXCM’s Marketscope 2.0, you can easily do so. Please click on File -> Create View -> Point & Figure.



    As you can imagine, a column moving higher or lower wasn’t easily recognizable and that was important for traders. Traders then combined these two methods to bring about Point & Figure charts, which you see on the right. Today, you’ll be learning how to use Point & Figures and why many find them helpful for discovering only the most important price action for the trend. The Point & Figure charts came about in the 1950s with “X”s up and “O”’s down and is what we use today.

    Why Traders Use Point & Figure Charts

    Due to technology, Point & Figure charts have fallen out of favor due to the likely fact that Point & Figure charts do not update in real-time, for a reason you’ll soon learn, and they may not appear as exciting as a short-term scalping chart. Point & Figure charts do not utilize time but only price. Therefore, you will not see a new candle print because there is a new day or time period like you do with candlestick charts. If price has not reversed or broken out from your predetermined levels discussed below, then there will be no change to the chart. In other words, the Point & Figure charts are famously objective.

    Learn Forex: It’s Hard to Argue that this trend is up



    Some traders feel that Point & Figure charts are one of the great secrets of the trading world that deserve to be uncovered and utilized once again. You can come to your own conclusion after this four-part series to see if you should combine Point & Figure with your trading. One common thread among many traders who have found Point & Figure charts is that you’ll have an easier time seeing a strong trend that shouldn’t be fought until a reversal takes way first.

    The Construction of Point & Figure Charts

    This is likely the most important aspect of Point & Figure charts that you need to understand before you move on to the next articles. Constructing the Point & Figure chart takes some decisions on your part that we’ll discuss shortly. Another great advantage to Point & Figure charts as you’ll see is that you have control over how much action you see.
    There are 3 main components that will be needed to construct a Point & Figure charts. The components are:
    -Reversal Size Parameter
    -Box Size Parameter
    -Price Data used for Chart Construction

    Once these three components are determined, you will come up with a specific name for your Point & Figure chart like a 10X3 chart or 1ATRX3 chart for example. This name type comes from Box size X Reversal. Also, please note that higher prices will be marked by X’s and O’s for down-columns.

    The reversal size will determine how sensitive your charts are. This will be determined by how many X’s or O’s the price must reverse before changing columns. The most common choices are 1-box reversals and 3-box reversals. A 3-box reversal chart will require 3x the amount of price action against the prior trend before reversing than a 1-box reversal.

    Learn Forex: 1-Box vs. 3-Box Reversal on EURUSD



    The chart above has a 1-box reversal on the left and a 3-box reversal on the right. The parameter used to calculate box-size is the current ATR on EURUSD which sits near 75 pips. You can easily see the recent price action calculated presented differently through these different manners.

    Changing the box size effectively changes your time horizon and method of analysis. There are different trading signals for 1-box reversal charts vs. 3-box reversal charts. You can also make price projections with Point & Figure charts which will differ for each chart. This will be described in an upcoming article.

    Learn Forex: Short-Term Traders May Prefer to Reduce Box Size




    Short-term traders may wish to have smaller boxes such as a 1-box or 3-box reversal chart with a box size of 10-pips. Here is a snap shot of EURUSD. The chart on the left is a 1x10-pip Point & Figure chart and the chart on the right is a 3x10-pip Point & Figure chart. You can easily see that the direction is the same on this smaller time scale only the 3-box reversal displays a lot more data. 1-box charts were commonly used when floor traders used Point & Figure charts in the early part of the 20th century.

    Learn Forex: Which High-Low-Open-Close Data Will You Use?



    The last component is the data that you will use to construct the Point & Figure chart. This is a critical question and will also determine the high or low that you use. You can use the high or low for every minute which is the original method or the high or low for every day. Another data source often used to construct Point & Figure charts is the high, low, or closing price at the end of the day. The trouble with using tic by tic data is that there is more noise than signal.

    End of day close or End of day high or low have become the gold-standard for most who use Point & Figure charting. The reason that Point & Figure charting uses the High or Low vs. High & Low is that you can’t use both. Point & Figure is a directionally biased charting method favoring the prevailing trend and if you’re currently in a series of X’s or rising prices, you’ll use the high of the day to see if a new box is warranted.

    One last important note about not using the high or low is that you don’t know which manner they occurred. If a high produces a new X in a column of current X’s, the chart will post a new X for the new box size. If a reversal of an uptrend has happened according to your rules above, then you’ll look to the low of the day to plot the reversal. If there is no new high or reversal then you’ll ignore the day.

    To answer the question, which is better? There is no clear answer however, most western methods of technical analysis like the simple moving average utilize the close price. You can choose which method you prefer but the Daily close data seems to incorporate the preference of majority of traders who utilize Point & Figure Charts for analysis purposes.

    Closing Thoughts

    Today’s introduction to Point & Figure opens up an exciting avenue of analysis for your trading. It may be helpful for you to see Point & Figure as a new objective way of identifying price action but not necessarily a chart that you will enter trades on. The next article will divulge into how you can use 1-box & 3-box reversal charts together for a full view that many other traders are not considering to possibly bring you an edge.

    Happy Trading!

    ---Written by Tyler Yell, Trading Instructor

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    Unlocking the Value of 1-Box and 3-Box Point & Figure Charts

    Unlocking the Value of 1-Box and 3-Box Point & Figure Charts

    Talking Points:

    • The Benefits of Multi-Time Frame Analysis
    • Multi-Reversal Box Analysis Allows P&F Multi-Frame Analysis
    • Key Signals From 1-Box & 3-Box Signals

    Point & Figure is a charting method to help you decipher the signal from the noise in price action. You were introduced to the construction of the charts and logic in the most recent article. However, the advent of the computer have brought focus on real-time charts which can have bring more noise than signal.

    The Benefits of Multi-Time Frame Analysis

    Many traders have become fond of Multi-Time Frame (MTF) analysis. The basic premise is that if the daily trend is up like we see on EURUSD, then you should look intra-day for entry’s higher.

    Learn Forex: EURUSD Daily Paves the Way for Smaller Time Frame Trades



    3-box reversal charts allow you to have a more objective view with objective patterns, trends and targets. The 1-box chart allows you to see a more flexible chart with the restrictions of Point & Figure but to a lesser degree but the analysis is a more subjective similar to an hourly chart being a bit more subjective than a daily chart.

    Key Signals from 1-Box & 3-Box Signals

    3-Box reversal Point & Figure signals are simple. You’re predominantly looking for bullish control by breaking through prior resistance or bearish control by breaking through prior support. On a candlestick chart, this is known as a double-top or double-bottom breakout.

    Another popular breakout or signal on Point & Figure chart is a breakout from a triangle similar to the one seen on the right chart below. As you now well know, a breakout in Point & Figure mean more than candlestick charts as it takes a breakout from a 3 multiples of ATR against the prior trend in order to register a breakout.

    Learn Forex: 1-Box vs. 3-Box Reversal



    1-box reversal point & figure charts have a few key signals that are easy to recognize and can confirm the prior trend when recognized. 1-box reversal can be more subjective because the chart can reverse without nearly as much price action as a 3-box reversal point and figure chart. However the fulcrum is the main signal that helps you recognize reversals where semi-catapults help you recognize continuation of a prior trend.

    Learn Forex: 1-box Semi-Catapults & Fulcrum Signals



    The name of the 1-box signals help you visualize their purpose. The fulcrum, above on the left, helps you see when price pivots away from the direction of the prior trend and is a reversal signal. The next signal for the 1-box chart is the continuation signal known as a semi-catapult. Because 1-box charts only have 2 signals, or one for reversals and one for trend continuation, you can see how these type of charts can simplify your trading.

    Summary

    The reason why Point & Figure charts have stood the test of time can be summed up in the word, simplicity. The 3-box chart keeps you looking for double-top or double-bottom breakouts or breakouts out of congestion. The 1-box P&F chart keeps you looking for semi-catapult trend continuation signals or fulcrums as a trend reversal signal.

    Point & Figure doesn’t have to replace your current charts. However, P&F can provide a calm assurance that the breakout your trading is legitimate or help you see whether it is worth buying a low or selling a high price level. As usual, it’s best to keep an eye for reversals higher before trying to buy low or reversals lower before trying to sell high.
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  3. #3
    Senior Member ForeCastle's Avatar
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    Projecting Price Targets with Point & Figure Charts from Breakouts

    Talking Points:

    • Why Use Price Targets
    • Price Targets on 1-Box vs. 3-Box P&F Charts
    • What Targets Should You Ignore?


    “Wishful thinking must be banished.”
    “I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.”
    -Jesse Livermore

    One of the first mistakes that traders fall prey to based on their own faulty thinking is exiting good trades too soon. If this was the only problem, traders wouldn’t be so bad off but the other thing we’ve found is that traders also hold on to losing traders longing their winners hoping they eventually come back. The bad trades all too often don’t come back and traders are forced out of their bad trades at bad prices instead of deciding when to get out of them

    Why Use Price Targets


    If you identified with the problem mentioned in the opening paragraph of holding on to losers too long, do not lose hope. There are a few reasons why traders can do much harm to their account equity by holding onto traders too long:

    • Trader’s don’t know exactly what they’re trying to get out of the market
    • Trader’s don’t want to admit that their analysis was wrong
    • Trader’s don’t have firm points of ruin where they see the trade as no longer worth it

    To help you attack the first reason why traders hold on to loosing trades, it may be helpful for you to learn how to do P & F price projections. While note a panacea, Point & Figure ‘counts’, can help you to hold on to a profitable trade to either squeeze more out of your good entry or at least bring your stop to break even so that you are at least limiting your risk. Last week, you learned that the two most common types of P&F charts are 1-box & 3-box charts and today you will learn how to create price targets on both charts from both horizontal and vertical price action.

    Price Targets on 1-Box vs. 3-Box P&F Charts

    Ideally, Point & Figure charts should be added to your current analysis routine while not replacing your trading charts and also allow you to see from a glance how strong a trend is or how stubborn a price range is. Also, 1-Box & 3-Box P&F charts should be utilized in tandem as they complement each other more so than compete against each other. The first price target we will look at are horizontal counts from a congestion breakout on the more active, 1-box charts:

    Step 1: Identify an Area of Congestion on 1-Box Charts




    Step 2: Identify How Many Columns Occupy the Range



    Step 3: Project Target from the Breakout Direction (Congestion X Box Reversal)



    While it may look difficult at first glance, it’s actually quite easy. Here are the steps again:

    • Identify an area of congestion on your 1-box reversal Point & Figure charts like seen on AUDUSD
    • Count the number of columns occupied in your Point & Figure prior to breakout (ex. 11)
    • I look for the point at which price stops progress to the following breakout
    • Develop a pip count projection by multiplying box reversal size (1ATR) by # of columns (ex. 11)
    • Project the pip amount from the breakout for your price target: 1.0160 – 0.0880 pips: 0.9280


    3-Box Counts

    The purpose of Point & Figure charts was to allow you to get a clear understanding of what is happening in terms of overall trend without being a slave to the charts. Before computers and real-time charts, investors could simply pull the high or low on the day and use that data to compile their own P&F charts. The 3-box are seen as less subjective however, because so much price action is lost in the 3-box charts, I prefer the 1-box counts price projections over the 3-box but both can be helpful.

    Point & Figure Price Projections on 3-Box Reversals (Same Idea as 1-Box)




    Before you count every consolidation, there are a handful of rules that as to what price action should precede a congestion pattern worth counting a price projection from. The key things to look for are a strong prior trend that runs out of steam which we had from 2009-2001, a topping pattern when you can see from the triangle, and finally, a turn in the trend as the congestion sees a breakout. You’ll notice above that the price target of 1.2000 hit nicely in due time but please note that P&F price projections are not guarantees of future price action.

    What Targets Should You Ignore?

    You should note that not all counts will be achieved. Many traders to this day will have multiple counts where they will take money off the table when targets are met along the way. Once a count is negated, it’s best to ignore the targets that you calculated. You can consider a count negated when price move or reverses beyond the column that the price projection started from.

    Learn When to Retire Price Projections



    Happy Trading!

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    How Many Pips Should We Target Per Day?

    Talking Points:

    • Targeting X amount of pips per day is unrealistic.
    • We should instead focus on diligently following our strategy.
    • Trading with an edge using limited leverage should yield a profit over time.

    About once a week I receive an email from an aspiring Forex trader telling me that part of their trading plan is collecting a consistent 10-20 pips a day from the market. Or they might just ask me flat out for a strategy that only makes 10-20 pips a day. There is a glaring problem in thinking of trading in this way. Not that it’s bad to set goals, but it’s bad to set unrealistic goals like this.

    Unrealistic Expectations

    The problem with setting a goal of X amount of pips per day is that the market changes every day and no strategy will be that consistent. We must accept the fact that we will have losing trades, losing days...even losing weeks and months. So trying to achieve this type of daily goal is setting ourselves up for failure before we even place our first trade.
    Another problem this type of goal produces is that it encourages trading more during times when our strategy is not effective and less during times when our strategy is more effective. Think about it.

    If we place a couple quick trades in the morning and hit our “pip goal,” we might be missing out on additional profitable trades that could occur during ideal market conditions. We are limiting what our strategy can earn when it’s working well.
    If our first couple of trades are losing trades, we then will need to place more trades to dig ourselves out of a hole before hitting our profit target for the day. The problem is, if market conditions are not right for our strategy, we are forced to continue trading (and place more trades) which could result in greater losses.

    Rather than focusing on earning a specific number of pips per day, we need to focus on what we can control and what’s most important.

    Focusing on What’s Important

    So what can we control? We can control our actions; meaning we can follow our strategy perfectly, with no emotion or hesitation. Once we have developed a winning strategy, the last step is execution of the strategy itself.

    We need to stick to our plan by not getting overconfident when we are winning and to not shy away from placing the next trade when we are losing. If we believe we have a trading edge, the winning or losing of each individual trade doesn’t matter, it’s the process that matters. Money management is included in that as well.

    We want to avoid revenge trading, or adjusting our trade size in an attempt to recoup losses. We also want to avoid increasing our trade size just because we have had a good run and feel more confident. There is a reason why we have decided to trade the trade size we are trading to begin with, so stick to it. The best part of trading with an edge is that over time, we should expect to be profitable.

    Let Time Take Its Course

    After we are following our strategy diligently and are confident we have an edge, the final ingredient is time. Markets are not consistent and neither will your day-to-day results be. We need time for the odds to play out in our favor. That means not dumping a strategy just because it had a losing week/month.

    EVERY trader will have losing streaks. It is not the fault of the trader or the strategy, but part of working in this field. Again, the only thing we can control is the actual execution of our trading plan. Time and the market will do the rest.

    Pips vs. Profitable Trading

    Going after a certain number of pips per day sounds like a good plan when we first start out Forex trading, but it is an unobtainable goal. The market is not consistent enough to pull out consistent profits day in and day out. What we need are goals for things we can control, like following our strategy and executing it flawlessly.

    Good trading!
    ---Written by Rob Pasche

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    Point and Figure MS Excel Spreadsheet

    I found it on this website - Point & Figure chart in excel (attached).
    Attached Files Attached Files
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    StepChartBricks indicator with ability to plot the Point & Figure Boxes

    Just want to remind about the indicator from premium section:

    - StepChartBricks_v3.1 600+ indicator is on this post. This is updated StepChartBricks indicator with the new set of MAs and with ability to plot the Point & Figure Boxes. The version is for the build 600 and above

    Understanding Point & Figure Charts Part I of IV-eurusd-d1-alpari-limited.png


    Understanding Point & Figure Charts Part I of IV-eurusd-d1-alpari-limited-2.png


    Understanding Point & Figure Charts Part I of IV-pf1.png
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    The USD/JPY Tests Support at 113.46

    Talking Points

    • The USDJPY has Declined 52 Pips in Early Trading
    • Bearish Breakouts Begin Under 113.14

    Understanding Point & Figure Charts Part I of IV-usdjpy-w1-alpari-limited.png


    The USD/JPY is trading near values of support after declining as much as 52 pips on the day. Currently range support is found near the S3 pivot point, which is found near 113.46. In the event that prices continue to consolidate, it opens the possibility that the USD/JPY may attempt to bounce towards values of resistance. With today’s range measuring 62 pips, range resistance is found at the R3 pivot at a price of 114.08. Final resistance for the day is found at the R4 pivot point at price of 114.40. If the USD/JPY trades above this value it would be significant as it would be the first bullish price breakout for the pair in the last six trading sessions.

    Alternatively, if prices break below the S3 pivot point, next support is found at 113.14. This value is represented in the graph above as today’s S4 pivot. A move below 113.14 would also be considered significant, as prices would be challenging the current monthly low at 113.12. If prices trade breakout below the S4 pivot, traders may extrapolate a 1X extension of today’s 62 pip range to put initial targets near 112.52.

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    Premium section P&F indicators:

    Understanding Point & Figure Charts Part I of IV-p222.png


    Understanding Point & Figure Charts Part I of IV-p333.png


    Understanding Point & Figure Charts Part I of IV-p11111.png



    P&F Boxes:
    - PointAndFigureLiveChart_v1.3 600+ indicator is on this post. Those are the PointAndFigureLiveChart indicator and the PnFOnOfflineChart indicator which helps to plot the P&F Boxes on the chart. Template file is on this post. This version works with Metatrader 4 build 600 and above.
    - PnFOnOfflineChart_v1.1 600+ indicator is on this post. Those are the PointAndFigureLiveChart indicator and the PnFOnOfflineChart indicator which helps to plot the P&F Boxes on the chart. This version works with Metatrader 4 build 600 and above.
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    Metatrader 5 - Indicator for Point and Figure Charting

    Indicator for Point and Figure Charting

    Understanding Point & Figure Charts Part I of IV-ris_11__1.png


    • "There are lots of chart types that provide information on the current market situation. Many of them, such as Point and Figure chart, are the legacy of the remote past."
    • "This chart type has been known since the end of the XIX century. It was first mentioned by Charles Dow in his Wall Street Journal editorial written on July 20, 1901 who labeled it the "book" method. And although Dow referenced the "book" method as far back as 1886, he was the first to officially set down its use to this day."
    • "Despite the fact that Dow only described this method in editorials, you can now find a lot of books that give the details of this method. One of the books I would recommend to novice traders is a book by Thomas J. Dorsey entitled "Point and Figure Charting: The Essential Application for Forecasting and Tracking Market Prices".
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  10. #10
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    PnFPatterns_v1.0 600+ indicator is on this post. This is the advanced PnFPatterns indicator with ability to detect 11 most occurring Point and Figure patterns. This version works with Metatrader 4 build 600 and above.
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