What Is A P&F Chart?
The point and figure chart is a study of pure price movement in that time is not taken into consideration while plotting the price action. Since only price changes are recorded, if no price change occurs then the chart is left untouched.
Point & Figure charts use rising columns of X's and descending columns of O's to represent these price movements.
What an investor sees when looking at a P&F chart is the underlying supply and demand of the security. The columns of X's illustrate demand exceeding supply (rally), and the columns of O's illustrate supply exceeding demand (decline).
This article describes the mechanics of using SharpCharts P&F Charts. To learn how to analyze and interpret the charts, check out our Chart School.
How Are P&F Charts Calculated?
As stated above, Point & Figure charts show an "X" when prices rise by the amount of the "box size" (a value you specify) and show an "O" when prices fall by the amount of the box size. If prices rise or fall by an amount that is less than the box size, no X's or O's are drawn.
Each column contains a stack of either X's or O's, but rarely both (using a 1 box reversal can result in an X and O stack). Columns will always alternate between X's and O's, and in order to change columns, prices must reverse by the "reversal amount" (another value you specify) multiplied by the box size. For example, if the box size is 5 points and the reversal amount is 3 boxes, then prices must reverse direction 15 points (5 x 3) in order to change columns. If you are in a column of X's, the price must fall 15 points to change to a column of O's. If you are in a column of O's, the price must rise 15 points to change to a column of X's.
The columns of X's and O's represent price trends. So when a column changes, it likewise signals a change in the trend of prices. When a new column of X's appears, it shows that prices are rallying higher. When a new column of Os appears, it shows that prices are moving lower.
Because prices must reverse direction by the reversal amount, the minimum number of X's or Os that can appear in a column is equal to the "reversal amount."
It is common practice is to use the high and low prices (not just the close) to decide if prices have changed enough to display a new box.
Notes and references
- http://stockcharts.com/help/doku.php?id=support:using_sharpcharts_point_and_figure_charts
See also
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