Point and Figure Charting: Part 1 - The Basics
Point and Figure (P&F) charting has been around for well over a century, occupying a bit of a niche. It tends to be an area that some get quite heavily into, while a fair percentange of the non-users look at it now and again and regard it as something they’d quite like to get the hang of but never seem to get round to it. As what it does for traders today is far more important than whether Dow used it in 1903 (in my view at least) that’s it for the history lesson.
P&F charts go left to right, with columns of X's and O’s showing periods when the price was climbing or dropping. That’s not all that dissimilar to most other chart styles – where P&F deviates somewhat is in the fact that a column can last anything from a day to weeks, months, even years whilst your candlestick chart will draw a new candle every day. The P&F chart only swaps to a new column if the price is deemed to have changed direction by a significant amount – what constitutes ‘significant’ can be decided by the user, their software, or a combination of the two.
caption: FTSE100, Bullish Percentage, mid-Dec 2004
I’m going to describe charts (mainly) using ‘End of Day’ terminology, but P&F works in any timescale – I run charts based on daily and weekly data, I also have charts based on RT data down to a minute per bar... they are constructed pretty well the same way, and give the same information to the user. I’ll use the term ‘bar’ to describe the basic unit of data – ie it might be a 1 minute, 1 hour, daily, weekly, monthly... who cares.... whatever the timescale you’ve decided to base charts on, one bar of that data has O,H,L,C and V data.
caption: SP500, 1 minute, bar-based
P&F charts are equally tradeable in realtime, the above chart shows a current (at time of writing) SP500 chart. Breakouts, trends and reversals are still readily apparent on the charts – this one spans 7 trading days...
There are a lot of online resources you can look at regarding how to construct a P&F chart, and a number of good books on the subject. You’re going to get my personal opinion along the way here, so my apologies in advance to anyone I offend by being less than awestruck when referring to the big names in the field... I don’t think trading is improved by slavishly following others, and if I disagree with a ‘name’ then I’m inclined to say so.
Books you might consider reading include:-
One of the bigger names in P&F is Tom Dorsey, and whether you subscribe to his ideas on using the signals or not his book on the basics of P&F is good as a reference – cunningly titled ‘Point and Figure Charting’ it’s not exactly bargain basement stuff, my copy was $60 or so several years back. ‘The Complete Guide to Point and Figure Charting’ by Heinrich Weber & Kermit Zieg, published a year or so back by Harriman House, is much cheaper at £29.99 – usually you can get it for rather less than this, £20 or so. T2W’s bookshop leads into Global Bookshops, they flog this (they publish it) and you’ll get a cheaper copy by using the onsite shop. Whilst not being quite as encyclopaedic in approach it explains chart construction etc perfectly well, and goes on to discuss actually using the charts in (to my mind) a more realistic manner.