Technical analysis of “Point & Figure” charts
the current article, we will continue to learn the basic trading
strategies using "Point
chart. Earlier, we have told about the history of these charts, have
shown how to set up them in our platform. Now, let’s move to the
Ascending and descending trend lines
One of the most basic and important elements when analyzing "Point & Figure" charts are the trend lines. As with ordinary charts, the uptrend lines limit the quotes from below, and the downtrend lines limit the quotes from above. To build the uptrend line at least two lows are needed – pivot points.
It is also necessary that all the quotes were above the uptrend line, as on the picture below. Here we can see that there was a breakthrough of the uptrend line, and downtrend appeared:
"Point & Figure" chart, EUR/USD, P&F 13*3 1m
Trading tactic by the trend lines is the same as when trading on ordinary charts – if the price breaks the downtrend line, then go long. If the price breaks the uptrend line, then go short. In the books and articles dedicated to "Point & Figure" charts is often written that the trend lines on these charts are strictly at an angle of 45 degrees for an upward trend, and 135 degrees for a downward trend.
This is true, if the elements of the "Point & Figure" charts have the same width and height. When plotting the "Point & Figure" chart in the PTMC platform, the chart elements are usually stretched in height, and the trend lines will be held at other angles.
One more example of the trend line breakthrough:
"Point & Figure" chart GBP/USD, P&F 9*3 1m
Support and resistance levels
Let’s remind, that level in the graphical analysis is called a horizontal line, from which the price bounced at least once. Levels help us to predict the behavior of prices in the future – we assume that the price behavior will be changed near the level. If we assume that the price will bounce from the level, we open a position, placing Stop loss order above (below) the level. If the price "bounces" from the level, we’ll get a profit. If the level breakthrough occurs, Stop loss order will trigger. The example of plotting these levels and price behavior near them we can see on the picture:
"Point & Figure" chart, EUR/USD, P&F 9*3 1m, "Candle" style
USD/JPY chart, P&F 10*3 1m
Take profit levels when using "Point & Figure" charts are defined with two methods called "vertical" counting and "horizontal" counting. When "vertical" counting for a long position is used, it is necessary to count the number of "figures" in the first column, which broke through the previous consolidation, and on which the signal to buy occurred. Then, this number must be multiplied by three. Next, the obtained number of "figures" must be marked off from the lowest point, at which the upward trend begins. Therefore, we’ll get the price to set up the Take profit order. For downward trend we do vice versa, mark off the triple number of "points" in the first impulse, after the reversal down. "Horizontal" counting differs from "vertical", so that we do the same calculations based on the width of the horizontal consolidation. For example, if width of the consolidation is five "points" and "figures", the price can go from a base of fifteen points.
"Vertical" counting – objective on the chart CHF/JPY, P&F – 10*3 1m
"Horizontal" counting – objective on the chart AUD/CAD, P&F – 10*3 1m
Figures of technical analysis on the "Point & Figure" charts
Owing to the ability of "Point & Figure" "compress" the price chart, we can see more clearly not only the levels of support and resistance, but also figures of technical analysis.
"Double top" and "Double bottom"
These models portend a reversal of downward trend and upward trend, respectively.
"Double top" – signal to sell on the chart GBP/JPY, P&F – 10*3 1m
Signal to sell occurs after a breakthrough of support level.
"Double bottom" – signal to buy on the chart GBP/CAD, P&F – 10*3 1m
Signal to buy occurs after a breakthrough of resistance level.
"Triple top" and "Triple bottom"
These two signals are similar to the previous ones, but contain one column more – three times the price rises or falls to the same level before break it through.
"Triple bottom" – signal to buy on the chart EUR/CAD P&F – 15*3 1m
Signal to buy occurs after a breakthrough of resistance level.
Occurrence of the triangular formation on the charts suggests that supply and demand are balanced. However, over time, supply or demand will outweigh, and the price will come out of a triangle, herewith a new trend will be formed. Under the rules of "Point & Figure" chart, a triangle must contain at least five columns. The first four columns form the figure, while the fifth is a breakdown. Herewith, each subsequent X-column must be lower than previous (each 0-column must be higher than previous). In the case of the triangle appearance on the chart, is better to wait for the moment, when price breaks through the line of support or resistance, comes out of the triangle and confidently moves in one direction.
"Triangle" as a reversal figure on the chart CAD/CHF P&F – 15*3 1m
to sell occurs after price breaks through the support level.
"Bullish catapult" and "bearish catapult"
These formations are formed in the case, when the price breaks level of resistance or support, formed by multiple tops or bottoms. After a breakthrough, the price forms a correctional column, which however does not reach the previous highs or lows. Impulsive movement in the direction of the basic breakdown finishes the “catapult”:
"Bearish catapult" – AUD/CHF, P&F – 15*3 1m
These formations are only used on the "Point & Figure" charts.
In addition to these, there are other formations on the "Point & Figure" charts – such as, "Shakeout", "Long tail down", "High pole" and variations of formations, which have already been described in this article. If you are interested in trading with "Point & Figure" charts, you can obtain detailed information if you refer to the source – the book of Thomas Dorsey.
Placing Stop Loss orders
Usage of the "Point & Figure" charts in the PTMC platform allows traders to define effectively the direction of the main trend, build trend lines, and find graphical figures. One more advantage of "Point & Figure" charts is the ability to open positions, place Stop loss and Take profit orders on clearer price levels. Orders can be placed under the nearest column of "points" from the entry point when opening a long position, and above the nearest column of "figures" when opening a short position. Herewith, Stop orders are usually small, that minimizes the loss when prediction is failed, and changes in price are unfavorable for us. Stop orders can be adjusted when the price moves in the profitable direction – move them after the price under the new columns of "points" in the case of a long position, and above the new columns of "figures" in the case of a short position. Therefore, Stop loss that initially protected us from the losses, during the motion would protect the obtained profit.
Disadvantages of the "Point & Figure" charts
In my opinion, the "Point & Figure" charts are not suitable at all for the analysis using indicators. This is due to the fact, that long-term unidirectional price movements are displayed as a single column, which has one timestamp. Because of this, indicators using the averaging, will be greatly delayed as compared with the same indicators, built on ordinary time-based charts. Therefore, if you use the indicators in your trading system, then build them on ordinary charts with a linear time scale.
The "Point & Figure" charts in the PTMC platform, in spite of their more than a century history, are a convenient tool and a good alternative to the candlestick and bar charts, when holding the graphical analysis.