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PTMC team 04.07 2016

How to trade with the “Point & Figure” charts?

Hey there, Protraders!

Earlier, we have mentioned about “Point & Figure” charts on our website in the article "Non-standard types of price charts", where we have considered only briefly the algorithm for plotting these charts. At first glance, they may seem unclear and difficult to analyze, but in fact, it is not. In this article we will consider in detail “Point & Figure” chart, will concern the main methods of the technical analysis, and of course, we’ll discuss the practical examples of trading by them.

The history of the "Point & Figure" charts

This method of the price chart plotting has been known since the late of 19 th century. Initially, it was called as “book method”. That was the name used by Charles Dow in the editorial article, "Wall Street Journal" dated July 20, 1901. In this article, Dow claimed that the “Book method” in vogue for already the past fifteen years, i.e. he attributed the date of its birth to 1886. Since 1901, this method of price movement analysis began to gain popularity in the US, and for today remains one of the most popular among US traders.

How to build "Point & Figure" charts?

Only the price is taken into account when plotting "Point & Figure" charts. Herewith, the time scale is obtained uneven. For example, if to build “Point & Figure” using minute charts as a basis, we can see the history of more than two days in one window. While the original minute chart displays (in normal, not too small scale) the history of no more than three hours.

Comparison of 1m charts with "Point & Figure":

Comparison of 1m charts with "Point & Figure"

Once we have defined based on which chart we will build the “Point & Figure”, we have to choose two more parameters – “Box size” and “Reversal”. Box size – is the size in points of minimal chart element. The price movements less than this value will be ignored and will not be displayed on the chart. Thus, we will carry out filtering, and will display only significant price movements. This is one of the advantages of “Point & Figure” charts. They allow the trader to focus on the significant price changes, ignoring time. Parameter “Reversal” is the number of “Boxes”, which the price has to pass in the opposite direction in order to fix the trend reversal.

For example, we chose “Box size” equal to ten, and “Reversal” equal to three. Herewith, if the price grows on ten points, “figure” will appear on the chart. If the price grows by another ten points, one more “figure” will be displayed on the chart, and so on. After the price unfolded and passed on the specified "box size", the column of three “points” appears on the chart. The simplest trading strategy is based on such chart behavior – Buy each time, if there is a new column of “figures” and Sell, when there is a new column of “points”. To use such a strategy it is better to choose bigger “Box size”, and use the large time intervals, for example, 1 day.

How to display “Point & Figure” chart in the PTMC platform?

In order to display quotes in the form of “Point & Figure” chart in the PTMC trading platform, open a new chart, and choose “Point & Figure” in the menu “Use predefined aggregation types” or “Set custom aggregation type”. Then you need to choose other parameters.

  • Build from – data, based on which “Point & Figure” chart will be built.
  • Value – the period of the initial chart.
  • Box size – size in points of the chart’s base element, point or figure.
  • Reversal – defines how much of box sizes should the price pass in order to display a new column of points or figures on the chart.

How to display “Point & Figure” chart in the PTMC platform?

Selection of the parameters “Box size” and “Reversal”

Minimal size of the price fluctuations will depend on “box size”, based on which the chart will be built. Too large size will hide a lot of pricing information; the small size will stultify the advantages of using this type of charts. In the book “Computer analysis of futures markets” the authors Charles LeBeau and David Lucas recommended defining the chart parameters, using “objective indicators” – two moving averages with a period of ten, built from maxima and minima of candles and bars. Half of the difference between the values of moving averages, rounded to the whole will be the optimal box size. At the time of writing this article, I got the box size equal to thirteen on a minute chart EUR/JPY. ((133.634 - 133.609) / 2 = 12.5 ~ 13). Parameter “Reversal” is often chosen equal to three. The same value is used by default in the PTMC platform.

Defining Box size, using indicators:

Defining Box size, using indicators

"Point & Figure" chart on the example of EUR/JPY:

Point & Figure" chart on the example of EUR/JPY

Please notice that in the PTMC platform there is a possibility to choose classical style of chart displaying in the form of points and figures, as well as a modern one, in the form of candles. The selection is made in the menu “Style”. Personally, I prefer the candlestick chart. It looks modern, and it is not cluttered with unnecessary graphical information.

"Point & Figure" chart, EUR/JPY 1m, 13, 3, “Candle” style:

"Point & Figure" chart, EUR/JPY 1m, 13, 3, “Candle” style:

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