How do I use Points and Figures charts?

In technical analysis, we rarely talk about point and figure charts. However, these graphs can constitute a mode of analysis in their own right. The popularity of dot and figure charts has been overshadowed in recent years by the success of Japanese candlesticks. These charts whose name literally translates to “dots and numbers charts” are sometimes very useful. The reading of these figures, just like the reading of the candles, proves to be an additional criterion in the decisions of the investor. The plot criteria, trend reversal, price target, are all technical tools of this little-known graphic plot.

I – The principle of the layout

The so-called point and figure (P&F) graphs are graphs composed of a succession of columns with crosses “X” and circles “O”. One of the advantages of this technique is to represent the graphs in a non-chronological way, that is to say that we will attach importance to the movements more than to the time.

Point and figure charts are very well described in John Murphy’s best sealer (Technical Analysis of the Financial Markets, 1999). Point and figure graphs were theorized by Victor de Villiers in 1933. (The Point and Figure Method of Anticipating Stock Price Movements, 1933). Moreover, the principle is relatively simple.

  • When the course of a period on the other marks a higher, we draw a cross (X).
  • When the price from one period to another marks a low, a circle (O) is drawn.
  • If the previous price is higher, then we change column (X) to start a column (O).

For example, the graph below shows the price of bitcoin (BTC) since 2017. It is clear that this plotted mode is not time dependent. The 2017-2020 duration is represented by a significantly shorter length than the 2020-2023 duration. Therefore, the plot is made from daily data. Also, another criterion used here is the minimum number of new bearish or bullish sessions needed to draw a new column. We have thus chosen 3 crosses “X” or three circles “O” to graphically represent a new column.

P&F chart based on daily data, each “X” or “O” represents $800.

Example P&F Plot

In order to better understand the plot, we have noted 10 daily prices on bitcoin (BTC). We propose to explain and represent the last 3 columns of the graph below.

Date bitcoin price
1 $24,287
2 $24,839
3 $24,442
4 $24,186
5 $23,942
6 $23193
7 $23,167
8 $23,564
9 $23,564
10 $23,290
Table of the latest bitcoin prices between February 19, 2023 and February 28, 2023.

The course starts on 02/19/2023. Also, it corresponds to the third column from the right of the chart below. We therefore draw each new column according to the following criterion: an “X” or “O” for each price evolution of $800. The second session, the price goes to $24,839, an increase of $552, we then draw a new cross “X”. Because we crossed the threshold of $24,400. Going below $24,400 on the 4th day, we draw a circle again and a new “O” column. The price then continues to fall. The next bearish threshold that translates the drawing of an “O” is $23,600. It is reached on the 6th day. We therefore draw an “O” below the previous one.

P&F representation of bitcoin (BTC) price. The data that interests us is represented on the last 3 columns. The thresholds that determine the drawing of an “X” or an “O” are respectively $24,400 and $23,600. Each “X” or “O” represents $800.

Therefore, it is understandable why a period of very directional rise or fall leads to a high concentration of columns. Conversely, the columns are more frequent and the time represented is more extended when the price of the asset is in a congestion trend.

II – Trend criteria

Once we have discussed the plotting criteria, certain criteria exist to anticipate trend reversals. For example, the graph below shows the price of bitcoin (BTC) but this time with weekly data and a criterion of 3 bullish or bearish reversals for each new column. The columns are therefore less volatile and numerous.

A criterion to help anticipate trend reversals and the criterion of the three boxes, or three plots. Whenever three “X” are drawn above the previous “O”, the trend is considered to be bullish. Similarly, three “O” circles below the previous “X” signal a downtrend. These signals have been represented with arrows on the price of bitcoin represented since June 2021.

Chart showing the price of bitcoin (BTC) in P&F. Plot on weekly data, criterion of 3 reversals for each new plot. Additionally, the arrows show the bullish or bearish signals provided by the presence of three “X”s or three “O”s above (under) the last high (low).

Downtrend signals were very recurrent since November 2021. From now on, it would still take a weekly rise beyond $25,000. Therefore, this increase would make it possible to draw a third cross “X”, and thus confirm an upward trend. In technical analysis, we can also use the criterion of 5 boxes, which allows greater reliability.

III – Horizontal price targets

The greater the congestion, the higher the goal. Indeed, we have seen that a large chart congestion signifies the absence of a trend that favors bullish and bearish movements. Periods of congestion can help set a bullish or bearish target. In other words, the method consists in calculating the number of columns in a period of congestion, then reporting this objective in number of rows.

P&F chart of bitcoin (BTC), daily data, amplitude of $1000 boxes. In addition, the objectives resulting from congestion have been added. The first congestion lasts 53 columns, bringing a target $53,000 above the neckline (53 boxes x $1000 per box). Also, the second congestion spans 30 columns, so the price target is $30,000 above the neck line (30 boxes x $1000 per box).

For example, the price of bitcoin (BTC, daily, criterion 1 reversal box) stagnated between January 2018 and September 2020. This congestion extended over the equivalent of 53 columns. A target of 53 lines above the neck line is then transferred. The goal reached was $63,000 (note that each “X” or “O” corresponds to $1,000 here). To better understand, we have selected a second period of congestion between May and July 2021. We can see that this congestion was very spread out compared to that of 2018 – 2020. Consequently, a congestion of 30 columns is measured, which is reported 30 rows above. Thus, we obtain a target of $69,000.

Finally, if we consider that a congestion started from June 2022, then we are already at 45 columns of congestion. The breakout of this congestion would operate above $26,000.

IV – Technical figures

Just as Japanese candlesticks offer technical patterns, this also applies for P&F charts. In John Murphy’s book, a summary of reversal patterns is presented.

Graphic taken from Technical Analysis of the Financial Markets, 1999, John Murphy. These are the main reversal patterns that are also found on Japanese candlesticks. We could also specify the existence of figures such as triangles, etc.

We find the classic figures of double bottom, V bottom, head shoulder head reversed… This reflects a change in investor psychology. Unlike Japanese candles, we have no indication of the magnitude of price movements (doji…). But a strong indecision will result in many columns, which not only makes it possible to anticipate a reversal, but also to set an objective in most cases.

V – Trend lines

Previously, we saw the three-box criterion for detecting a trend reversal. But this criterion is less reliable as the period studied is short and the trend is volatile. To overcome this difficulty, it is possible to draw trend lines with P&F charts. Trendlines are just as valid as on traditional charts because price information is always incorporated. This plotting system even makes it possible to simplify the trend lines by retaining only the price and adjusting the time effect.

P&F chart of bitcoin (BTC), daily data, $1000 per box. Additionally, we have added the main trendlines of the last few months. Indeed, the latter make it possible to more accurately determine trend reversals.

The chart above shows the price of bitcoin. Indeed, a large trend line has been drawn since September 2020 (main red line). This trend line was broken in January 2022. We could therefore, in addition, set a bearish objective by postponing the height between the breakout and the last highest. Objective materialized by the blue line. The breakout of an oblique resistance with an “X” cross higher than the line, or an “O” circle lower than the oblique support, marks a breakout signal.

The recent observation of the bullish movement confirms our analysis based on the previous figures. An oblique resistance frames the fall in the price of bitcoin (BTC) since November 2021. It would be necessary to cross $25,000 permanently to break this bearish line. This confirms our analysis on the basis of congestion, but also on the basis of the three “X” crosses.

In conclusion

Ultimately, we have introduced a type of chart that is little known but nevertheless used at the origins of technical analysis. The first traces of the use of these charts date back to the 1930s. Although these charts provide less detailed price information, they have the advantage of eliminating time information and focusing on the movements that interest us. The plot is therefore relatively more complex than that of Japanese candlesticks. We define a first criterion of amplitude of the “X” and “O”, then we define a second criterion of the minimum number of price reversals necessary to draw a new column.

Once the plot is done (it is automatically done on some platforms), you can analyze the different trends. An interesting analysis tool is to count on a new column a number of minimum “X” or “O” above (below) the preceding higher (lower). We have for example seen that for 3 “X” or 3 “O”, we could determine the existence of a new trend. But this criterion is not always reliable enough due to price volatility or short periods.

Thus, horizontal targets can be a reliable way to set price targets. Congestion areas are particularly useful and are highlighted by this drawing mode. Finally, just like Japanese candlesticks, P&Fs offer the possibility of analyzing reversal patterns. A final interesting tool is the study of trend lines. These also allow you to set goals. We can therefore see the immediate interest in such a graph, which has been partly forgotten in recent years. This method deserves to be updated.

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