Let's
begin with some of the basic differences between
point and figure charting and bar charting and look
at a couple of chart examples.
The
point
and figure chart is a study of pure
price
movement. That is to say, it does not take time into
consideration while plotting the price action. A bar
chart, by contrast, combines both price and time.
Because of the way the bar chart is constructed, the
vertical axis is the price scale and the horizontal
axis, a time scale. On a daily chart, for example,
each successive day's price action moves one space
or bar to the right. This happens even if prices saw
little or no change for that day. Something must
always be placed in the next space. On the point and
figure chart, only the price changes are recorded.
If no price change occurs, the chart is left
untouched. During active market periods, a
considerable amount of plotting may be required.
During quiet market conditions, little or no
plotting will be needed.
An
important difference is the treatment of volume.
Bar
charts record volume bars under the day's price
action. Point and figure charts ignore volume
numbers, as a separate entity. This last phrase, "as
a separate entity," is an important one. Although
the volume numbers are not recorded on the point and
figure chart, it does not necessarily follow that
volume, or trading activity, is totally lost. On the
contrary, since intraday point and figure charts
record all price change activity, the heavier or
lighter volume is reflected in the amount of price
changes recorded on the chart. Because volume is one
of the more important ingredients in determining the
potency of support and resistance levels, point and
figure charts become especially useful in
determining at which price levels most of the
trading activity took place and, hence, where the
important support and resistance numbers are.
When
compares a bar chart and a point and figure chart
covering the same time span. In one sense, the charts
look similar, but, in another sense, quite different.
The general price and trend picture is captured on both
charts, but the method of recording prices is different.
Notice the alternating columns of x's and o's. The x
columns represent rising prices, while the 0 columns
show declining prices. Each time a column of x's moves
one box above a previous column of x's, an upside
breakout occurs.
Correspondingly,
when a column of o's declines one box under a previous
column of o's, a downside breakout occurs. Notice how
much more precise these breakouts are than those on the
bar chart. These breakouts can, of course, be used as
buy and sell signals. We'll have more to say on buy and
sell signals a bit later. But the charts demonstrate one
of the advantages of the point and figure chart, mainly
the greater precision and ease in recognizing trend
signals.
Reveal
another major advantage of the point and figure chart:
flexibility. While all three of the p&f charts cover the
same price action, we can make them look very different
to serve different purposes. One way to change the p&f
chart is to vary the reversal criteria (let's say from a
3 box reversal to a 5 box reversal). The larger the
number of boxes required for a reversal, the less
sensitive the chart becomes. The second way to vary the
chart is to change the box size. By using the larger box
size, fewer signals are given. That allows the investor
to concentrate on the major trend of a market by
avoiding all the short term sell signals that are
eliminated from the less sensitive chart.
Reduces
the box size from 5 to 3. That increases the sensitivity
of the chart. Why would anyone want to do that? Because
it's better for shorter term trading. Compare the last
rally from 920 to 1060 in all charts. The 10x3 chart
shows the last column as a series of x's with no 0
columns. The 5x3 chart shows the last upleg in 5
columns-3 x columns and 2 0 columns. The 3x3 chart
breaks the last upleg into 11 columns-6 x columns and 5
o columns. By increasing the number of corrections
during the uptrend (by increasing the number of o
columns), more repeat buy signals are given either for
later entry or for adding to winning positions. It also
allows the trader to raise protective sell stops below
the latest columns of o's. The bottom line is that you
can alter the look of the point and figure chart to
adjust its sensitivity to suit your own needs.
Point and Figure Charting
versus Bar Chart
