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That Figures Using Point and Figure Charts to Stay in the Trend

In a recent Online Trading Academy Mastermind Community Clubhouse session I was teaching
some advanced stock charting techniques. A few of the students asked if I could revisit an old
topic I had written about called Point and Figure charting. I had learned this trading chart
technique as I was studying for my Chartered Market Technicians exams and have used it on
occasion to identify dominant trends and to keep myself from exiting positions too early.
Long before we had computers to chart price, traders were making a living and doing it by
watching price movement. One of the earliest types of stock trading charts was called point and
figure charting (P&F). It started from traders who would tick off prices as they watched the
trading. Eventually the ticks changed to Xs and Os to note movement in price and even see
trends.
Today, many chartists have switched to candlestick charting to make their decisions to buy or
sell. A drawback to this style of charting is that many people are prone to exiting early from
profitable trades when they see small pullbacks or corrections. An advantage of point and figure
charting is that it allows the trader to see the trend and stay in the trend even through minor
corrections. For this advantage we may sacrifice some profits with a larger stop, but with the
larger profit potential it may be worth it.
Another interesting feature of point and figure charting is that it does not take time into account
when charting. On a candlestick chart, you will have a candle for every period. For instance, on a
five minute chart you would have a candle every five minutes whether the price moved or not. In
a P&F chart, a new notation is made only when price moves by a certain amount. If there is no
trading or if price does not move enough, no notation is made.
To create the trading chart, you will use an X to note when prices rise by a certain amount and
an O when they decline by an amount. You only put either Xs or Os in a column. If you need
Os due to a reversal in price, you would start a new column. You do not put Xs and Os in the
same column. You must first decide the minimum amount of movement to note. This is referred
to as the box size. You can set the box size for anything you would like but remember, the
smaller the size the more sensitive the chart will be. This may be good for short term traders but
it can cause you to overreact to slight corrections. As a rule of thumb, you should set the box size
at about 1% of price. You could use 2% when charting indexes like the S&P 500 and the
NASDAQ.
You also need to decide the reversal setting. This will be the multiple of the box size that would
create a reversal signal. For instance, if you set the box size at $1, a 11 chart would change
from a column of Xs to a column of Os when price reversed by $1. On a 13 chart, you would
continue to mark Xs for the upward movements until you have price reverse by at least $3
($13). Once that happens, you would start a column of Os to the right of the previous column.

The larger reversal size will filter out many small corrections that might have otherwise scared
traders out of positions.
Buy and sell signals can be as simple or as complex as you would like. You can take a simple
buy signal when a column of Xs rises above the previous column of Xs. You could stay long
until a sell signal has been generated. The simple sell signal comes when a column of Os
breaks below a previous column of Os.

When we trade, we should know at least three things about the position before we take it. We
need to know our entry, the stop, and the target we hope to achieve. A point and figure chart can
offer all of that to us. We can place our stops for longs just under the last column of Os. As long
as there is no reversal that breaks that low, we stay in the trade.

The system would be similar for shorts. We would enter a short on a sell signal and place our
stop above the previous column of Xs. We would stay in our short position until we have
breached that previous high.

If we happen to be long or short in a large move we may not want to wait for a large reversal to
exit. If we were to wait, we may give back too much profit. So, instead of waiting for the typical
sell signal, stop yourself out when you have the first three box reversal.

For the target price, we can use a horizontal box count. When prices move, they usually originate
from a basing area. We can project the width of this basing to offer probable targets for the trend
when we are in. The target does not have a timeframe and can take time to reach. Remember,
only price movement matters, not the passage of time.

If we are using a larger reversal size, 13, 203 or so, we can still use a horizontal projection. In
this case, we would multiply the horizontal box count by the box size and the reversal size to
determine the projection length.

So, these are the basics of point and figure charting. Next week I will explore more advanced
techniques and patterns that you can trade using this style of charting.
Until then, trade safe and trade well.
Brandon Wendell

That Figures Part 2 Using Point and Figure Charts to Stay in the
Trend
In my first article on Point and Figure (P&F) charting, I discussed the basics of creating that
style of chart. In this article, I will build upon that knowledge and show more advanced methods
for identifying patterns and projecting price movement. I want to mention that I tend to use this
method of charting for longer term swing or position trades rather than intraday. Remember that
time is not a factor while attempting to achieve targets in P&F and you will likely hold positions for
some time.
Patterns in P&F charts are a bit different than what you may be used to in candlestick charting. A
triple top formation is not necessarily a reversal formation, it could be a continuation. It will still
offer a trading opportunity however. Look at the following examples of both the bullish and
bearish triple formation.

Even patterns such as triangles are visible and can be traded on P&F charts. They will work in
much the same manner as they would on candlestick charts.

I previously discussed the use of horizontal price projections. Many traders choose a different
price projection method. If you are not using a 1 box reversal chart and have instead selected a
three box, (this refers to how much price would have to reverse for you to start a new column,
$103 means price would have reversed a minimum of $30), you can try the vertical price
projection method. I have found this style to be more accurate in projecting targets.
The vertical price projection can only be made under certain circumstances. They are:
1.

1st move off a bottom (1st row of Xs)

2.

1st move down from top (1st row of Os)

3.

2nd move from top or bottom

Once you have counted the correct column, you can multiply that count by the per box value and
then multiply that number by the size for reversal. Your result should then either be added to the
price bottom or subtracted from the price top to give you the price projection.

Now that we know the basics and what to look for, lets examine a few P&F charts to see this
technique in action. I have a chart of the S&P 500 Index 103 point and figure format. The 10
means I need a minimum of a 10 point move between closing prices to make a new box of Xs or
Os. I must also have a minimum of 30 points (103), to start a new column for a reversal. The
numbers and letters refer to the months (1-9 are Jan. to Sept., A-C are Oct. to Dec.)

I can do the same with charts of individual stocks. I would simply adjust the box size on the chart
for stocks or the indexes due to their higher or lower prices.

If you are looking for smaller duration trades, you can lessen the box size and also the closing
periods. I had been using the daily closes on the previous charts. Depending on the trading
software that you use, you can set box size smaller. This makes the chart more sensitive and
allows you to see intraday activity. You can set the charts period to five minutes. If the close
from a five minute period would cause a change in the chart, it is noted instead of waiting for the
daily close.
By adjusting the box size and even what closing price the box will use, you can create all types of
interesting charts to follow trends in the intraday or even multi decade trend following charts. The
possibilities are limitless. Next week we will examine more strategies on point and figure charts
and how to use them in conjunction with our core strategy of supply and demand.
Brandon Wendell

That Figures Part 3 Using Point and Figure Charts to Stay in the
Trend
When technicians chart using point & figure charts, they are doing so to identify and stay in
longer trends. We do not want to be shaken out too early on a trade that could have yielded
much more profit. Therefore, we would want to make our signals less sensitive so we have fewer
of them or we need to use some sort of filter so that we do not take every trade we happen to
see.
We must have a trading plan or system designed around the use of our technical tools. In my
previous articles on Point & Figure charting (Part 2), I told you the need for identifying your
entry, stop and even projected target for the trade before entering it. Supply and demand levels
work the same in point and figure as they do in other styles of charts. Look for an area where
trend reversed strongly. Your typical rally-base-drop or drop-base-rally would do just fine. You
should look to buy or sell when you receive entry signals in those areas only.

One of the simplest filters is to make sure the trades we take meet the standard 3:1 reward to
risk ratio we always follow in our classes. Since we know our entry, our stop and can use supply
and demand or even the horizontal or vertical projections for our targets, there is no reason why
you cannot take only the trades that offer the greatest potential for success and the lowest risk in
relation to it.

The overall trend of price is something we look at to determine whether we should be a buyer or
a seller of a stock. Why should it be any different with P&F charts? The difference in drawing the
trend lines is that they are traditionally only drawn at 45 degree angles from a low or from a top.
You would not connect multiple lows for an uptrend or multiple tops for a downtrend as you
would with candles.

We can also limit our risk in trading by only trading with the trend. If you are above an uptrend
from a low, you would only look to enter trades when you receive a buy signal. Use the selling
signals to exit those longs only. You would not take a sell signal as an invitation to enter a short
as it is counter trend and has a lower probability of working. The short positions should only be
entered when you have a sell signal when you are trading below a trend line drawn from a high.
You would use a buy signal to exit those shorts but not to enter longs.

Breaking a previous column of Xs is a simple signal. So is breaking a previous column of Os. I


showed you some patterns that can be used as more advanced entry signals. There are many
others. Some technicians will only enter trades on a complex signal and then exit upon receiving
a simple signal. This will also serve to filter out a lot of unnecessary trades.
There are a lot of choices to screen out trades that are marginal. We want to trade smarter, not
more. No matter what system you create, be sure that it manages your risk properly and offers
you the opportunity to identify and take high probability, low risk trades. There are plenty of them
in the markets waiting for you.
Brandon Wendell
Bwendell@tradingacademy.com