Are Point and Figure charts (really) worth all the Hassle?

...and why this method might provide you with a much-needed edge in the markets.

5 minute read

Point and figure is a method of technical analysis which requires a degree of study, both in terms of reading as well as undertaking, before an individual becomes confident in its practical applications. Point and figure charts are composed in grid format, and whether you choose to write out charts by hand on blanks sheets of mathematics paper, or use a blank computer version such as an Excel spreadsheet, it’s understanding how to fill out the entries which is the most important aspect. Charts are compiled of columns of X’s and O’s, whereby X represents price reaching a specific value on an upward trajectory, and O shows that price reached a specified value on a downward trend.

Point and Figure Charts
Point and figure charts can take some getting used to, but they are a fantastic tool in that they don't show any form of time representation, all you see on the chart are the most significant price movements. Not many traders go to the trouble of creating charts like this so it can potentially serve as a highly advantageous edge.

There are a number of specific elements including 1 box point and figure counts, three box reversal patterns, box scaling and ranges; all of which will aid you to master the art of trading using this technique. Whilst learning this charting method will take up a significant amount of your time and trading resources, it will also provide you with a valuable new skill-set with which to add to your trading armory. Point and figure has a number of extremely useful advantages in comparison to using conventional charting techniques, and the first has to do with eliminating the time element from your market overview.

 

Whether you like to admit it or not, time has a huge bearing on your trading decisions, both when making predictions, and when you have a live position open in the market. You can feel pressured by time. It might be that you cannot wait to enter the market so you do so ahead of time, or it may be that you have held a position for such a length of time fear has set it and you feel compelled to bail out; feeling pressurized can most certainly cause you to make bad decisions in the markets.

 

Point and figure charts make no reference to time, new entry points of price information are only inserted into the chart when price has moved by a substantial enough amount. The amount with which price has to move in order to warrant a new entry into the chart is calculated via means of box scaling, a type of set scale which predetermines this for the trader. Trading in this manner means that entering and exiting the market is based purely on price movement, and the movement has to be substantial enough to warrant this.

 

Point and figure charting can make it far easier to identify areas of support and resistance, trends and reversal patterns by eliminating the periods of nonevent which get recorded on conventional stock charts. For some individuals this is enough to improve their trading performance significantly, and provide them with a whole new perspective on market price movements and patterns.

"Because of the simple structure used to create point and figure charts, chart drawings are far less ambiguous and can be seen with relative clarity. This can be advantageous if your mind tends to get boggled looking at conventional charts."

If you are a highly logical or analytical individual it is possible that your trading will benefit from point and figure charting because its mathematical and decisive nature will allow you to make more sense of the markets than using alternative methods. Most of the leading indicators like the average true range, MACD, and moving averages all use mathematics as well, but they also include an abundance of data (such as long periods of consolidation) which would be considered irrelevant where point and figure is concerned.

 

Point and figure offers a new angle on trading price action in the market, and indeed, a new approach to whichever trading methods or system you are currently using. It’s certain that trading proficiently using this method can result in far fewer mis-timed entries and the resulting stop-outs which ensue, but can also give a trader the visual reassurance to hold onto a position for far longer duration than they would have otherwise; resulting in the profits that inherently come with having the ability to do this.

 

Trading using this method doesn’t come without some disadvantages, and the first, and probably most prominent is the disregard of market rhythm to time entries. Many traders regard understanding market rhythm as one of the most fundamental aspects to becoming successful in the markets, and without it, failure is almost a certainty. Secondly, and again relating to the fact that point and figure gives no relevance to time, is that this method is really only suited to medium and long term trading. Anyone trading intraday might find using this method to be more of a hindrance than a help simply due to the time it takes to produce the charts.

 

Using point and figure in combination with a range of other techniques is likely where the best value is to be had, and compromise to be found. However, it will require a trader with a fluid mindset to implement this into their existing trading strategy. Whether or not you choose to incorporate this method into your trading, it is certainly an area every competent trader should have knowledge on. Learning techniques which other traders use in the markets will always add to your advantage and provide you with a far better market oversight in live situations.

 

Point and figure charting is fairly time intensive to learn, and does come with a number of caveats. That being said, if it does resonate with an individual who is more analytically orientated, then it can serve as an extremely powerful method of trading. As a professional trader you need to explore, through trial and error, every available method and system to find out which one works best in allowing you to profit in the market. It might be that point and figure charting techniques allow you to see the market in a more concise format, and in turn, identify entry and exit locations with far greater confidence and assurance.

 

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