Point and Figure Charts – Getting a Better Feel of The Market Direction

Charts came into existence to visualize the changing numbers. Charts make the data analysis and identification of trends easy by giving a visual edge to the numbers, especially when the data is huge and is rapidly changing.

Charts also evolved over time to make the interpretation of the data easier. There are various types of charts which are used in trading markets, right from line charts to bar charts to candlestick charts. One issue with all these different kinds of charts is that they all take into consideration every price movement. Candlestick charts give us a better picture because we only know the range of the movement during the selected time frame but still all the price movements are captured. While trading in Forex, stocks and other commodities, every change in price may not be really desired to be analyzed. Many changes in the price may just be like unwanted noises and these noises need to be ignored.

A trader, primarily, would be interested only in knowing the real price movements which indicate a real trend or the break from a trend. To get the picture of the real market trends we use various technical indicators various traditional types of charts. Point and Figure or P&F charts are a cut above the others and present us an opportunity to get a feel about the trends even without the technical indicators. Point and Figure charts give the real feel of the market by filtering out unimportant market movements and taking into account the movements which are significant and which really matter. A trader, with his or her experience and skills, decides as to what amount of the change in the price should be considered as significant. P & F charts take into account only these pre-decided amounts of change in the prices.

Components of point and figure charts:

1) Box Size: Box size is the price movement in any particular market direction (up, down or range) which is worth noting. While trading Forex, we may consider a 10-pips move as the box size if the market is not very volatile. The box size should depend on the volatility and we can consider bigger box sizes when the market is very volatile. The P&F chart would ignore any market movement which is less than a box size.

2) Reversal size: Reversal size is nothing but a change in the price which indicates that reversal in the ongoing trend may be taking place. Like the box size, we decide an amount (number of pips) as reversal size. If the price moves in the opposite direction to the ongoing trend and if the change is equal to or more than the reversal size, then only we would consider that the trend may be reversing.

The best part of point and figure charts is that we can plot the chart manually because we do not have to take into account every price change but only the significant ones. A point and figure chart is plotted by using the “box size” and the “reversal size” and to give a clear visual feel about the market trends while ignoring the unwanted noises of the market. Simple trend lines can be used to see the resistance and support levels and the breakouts to make trading decisions.

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