The theory behind this method of charting is that there is a 1:1 relationship between price movement and the price reversal. Point-and-Figure charts show price reversals over time. Unlike bar charts, P&F charts ignore small price fluctuations, trading volume and the passage of time. Each X or O represents every time the market price moves by a defined amount (such as 5,10, or 20 ticks).

In a point and figure chart, X's are for advancing prices and 0's are for declining prices. When the market reverses direction by the defined amount, a new column starts to the right at the corresponding price level. If the price moves in either direction by less than the certain amount (the minimum interval), no new marks will be made, no matter how much time passes. For instance, if prices are advancing and then decline by the correct amout of ticks, you begin an 'O' column after the 'X' column.

The price interval chosen to track market movement significantly affects the level of detail in the P&F chart. This price interval is referred to as the reversal number. For this reason, P&F charts are used to represent the inter-day (between-day) trading dynamics, and can be used to find congestion areas.

Point & Figure (P&F) charts are especially useful to short term speculators. Placing the X's & O's on a piece of paper is simply a method of depicting the short term price swings. No regular time interval exists at the bottom of a P&F chart. The reversal number (in the scale) determines when to move to the right on the chart. Volume and open interest is not available on a P&F chart.

:::::>Scale
Box size multiplied by reversal number (eg. .01 x .03)

:::::>Box size
any multiple of the minimum tic

:::::>Reversal number
the number of boxes required to terminate one column and begin the next column

 

These are only a few of the patterns used in forecasting market direction. These are all bullish patterns.