Point and Figure

Next I want to show you something I use each day to help me with my trading. Before you tell me I’m losing it, let me give you a little background.

When I started out there were no computers or internet helpers like we have today. We had to hand draw all our own charts. I always believed in the technical side of trading so I used a variety of chart forms.

One form I liked was called point and figure. It uses a series of X’s and O's, up and down, to show where prices have been. It’s pretty simple and if you’re a visual sort of person like I am you may find them useful. I’ve often thought there is so much hi-tech material available to the average trader that it just becomes overwhelming.

I’m sure there is more than one trader who has said, “I’ve got so many indicators I don’t know which one to believe.” I know I have!

So, point and figure (P&F) at least is simple to learn and understand. And with the tips I’m going to show you from my experience you might like it also. Anything that can help you identify the direction and movement of prices from one latitude line to another is going to be of value.

You can use any kind of graph paper you want, but my favorite is Mead 4/5 Quadrille graph paper which I get at Staples office supplies. It's already pre-punched with three holes, comes in tablet form, and is sturdy enough to withstand a lot of erasing!

It also has 1/4 inch squares on one side of the page and a smaller size on the other. That’s important because sometimes prices run off the sides or top and you have to readjust your drawing.

Along the left side we draw prices depending on the volatility we’re experiencing. You may have to experiment with this a little until you get the hang of it. I usually use a five minute chart with the quarter inch squares and assign each box one pip. You can see this a little better by looking at the next picture.

This is an exact duplicate of the candlestick chart, shown on Chart 5, in Organizing our Trade. You’ll notice we draw X’s as prices go up, and O’s when they decline. They reverse when prices rise or fall three boxes. There cannot be just two boxes of X or O’s.

The charts have no time frame -- a swing can be five minutes or an hour or more –although I ofen place a number at the bottom to show the time.

When drawing a P&F chart of a fifteen minute candlestick I generally use a two pip box. It looks like this. Can you figure out which chart I used?

That’s right. It’s the “Choppy Day” chart on page 45. Note how erratic prices are. It’s hard to predict their direction. But one thing is pretty certain. Once prices change direction they tend to keep on going.

What this means is once prices change direction we have a reasonable chance of making five or more pips on the move.

On the other hand go back to the previous chart on page 64. We see prices tend to consolidate or “congest” around the 54 to 64 area. Then they break out to the upside and congest some more around the 63 to 72 area.

Then notice how they are unable to better the 72 level. In fact prices fall to the 61 level, try one more time to rise, but are only able to reach the 67 level where they falter. The ensuing fall to 48 is brutal. Could you have caught this move? I’ll bet you would have!

Another feature of P&F charts is their tendency to stay within, or breakthrough, a line drawn at a 45 degree angle to a previous move. Like this:

Try using different price scales for different charts until you find the ones that seem to fit.
If you’d like to learn more about P&F go to www.chartcraft.com. Be sure to read the “Introduction to Technical Analysis.” Excellent background material.