Point and Figure Charts

Point and figure charts were originally designed for long term investors but are now also used by short term traders to trade stocks, commodities, options, or other financial instruments. Point and figure charts are considered by many stock traders to be the easiest charts to use when identifying solid entry and exit points while trading stock.

The stock investors who designed these charts were interested in trend trading and trend development and they wanted to find a way to flush out the market “noise” created by the minor up and down movements of stocks. These point and figure charts helped investors to find a way to see the bigger picture in relation to the supply and demand of certain stocks.

When using these charts the key is to establish the unit of measurement of price movement that is plotted on the graph, otherwise referred to as the “unit of price.” This type of chart only contains a price axis and does not have a time axis. The day-to-day price movements are charted where rising stock prices are displayed as X’s and falling stock prices are displayed as O’s. There are a number of columns that contain the X’s and O’s and these points appear only on the chart if the price moved at least one unit of price in either direction. Again, this stock chart filters out any non-significant price movements while enabling the day trader to determine the critical support and resistance levels. Traders then place their trades when the price moves past their support and resistance levels.

When learning about P&F charts you also find that the easiest trade signals on these charts are called “double tops” and “double bottoms.”  Double tops occur with the rise of a stock, a drop, another rise to the same level (as the original), and then another drop. The high that is touched twice (hence double top) is considered to be the resistance level. Double bottoms occur with the drop of a stock, a rebound up, and then another drop to the same (original) or similar level as the original drop, and then another rebound. The low that is touched twice is considered to be the resistance level.

In addition to P&E charts please also read about Japanese Candlesticks, a trading strategy used by some of the world’s most successful traders along with other forms of technical analysis. It is the fastest way for new investors to quickly and accurately read stock charts. Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns. Combine these with your favorite technical indicators and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds.