Point and Figure Basics

What are Point and Figure charts? And just what do all these bits of information mean? I'll explain that and then provide links to great sites which can round out your understanding of P&F.

Point and Figure is a method of charting stock price movements without focusing on the day to day fluctuations. It focuses on the balance of supply and demand and how these forces move the price of the stock. These charts consist of columns of Xs and Os to show stocks rising and falling in price. Chart boxes are drawn on the chart in scales that depend on the price of the stock - for example: stocks priced $20 - $100 the box scale is $1. Depending on the range of the high and low prices of the day, a stock might add a box to its current column, reverse to start a new column, or do nothing. In order to reverse into a different column, it would have to move a set number of boxes in the other direction (usually 3). In looking at which event occurred, we look first to continue the current column and then to create a new column. This means that if the stock is currently in a column of Xs we would check first if it created a new box and if it did, to mark it and then move on to the next stock. However, if it did not go high enough to mark a new box, but then went low to reverse, we would create the new column of Os.

In looking at prices to determine movement, high pries are rounded down to the last box level and prices are rounded up to the next box level. So, if the trading range of the day is 24.50 - 26.15, the low box level would be 25 and the high box level would be 26.

For example, let's take a look at how a stock would start its chart with a stock that just made its fictional IPO: XYZ. It started trading on Monday and had a range of 30 - 31.50 (low box level = 30, high box level = 31). We don't know enough yet to figure out which way it is going. On Tuesday, it trades with a high of 33.05 and a low of 31.40. From those prices, we can determine that our low box level has not changed, but our high box level is now 33. The stock has moved enough for us to know it is in a column of Xs since it has created 3 more boxes off of the low, starting at 30. On Wednesday, it trades in a range of 32.50 - 33.80, so it doesn't create any new boxes. On Thursday, it trades in a range of 33.00 - 36.50, creating three boxes for 34, 35, and 36. Our X column now ranges from 30 - 36. On Friday, demand slows for the new stock and it trades in a range of 34.25 - 35. In order to reverse, the stock would have to move three boxes down from 36 to 33, but it did not hit that yet and so the stock has done nothing this day. The following Monday, it trades in the range of 32.60 - 34.50. The low box for the day is 33 and it now creates a reversal into Os, with the new column range being 33-35. The next day it trades in a range of 34.25 - 36.25. Our stock has now reversed up three boxes off of the bottom into a new column of Xs. Our new column range is 34 - 36.


Next time, I'll go into signals and what they mean. Until then, here are a couple links to help you get started.


Site: Understanding Point and Figure Charts at StockCharts.com

Site: P&F University at Dorsey Wright & Associates

Book: Point & Figure Charting: The Essential Application for Forecasting and Tracking Market Prices by Thomas J Dorsey