The Point and Figure chart presents price movements that are independent of time. P&F charts plot X’s and O’s that form columns for price fluctuations. Originally, P&F charts were built for stock trading, but now they are used in every financial market, including forex trading.
What are the Point and Figure charts?
The Point and Figure charts, like its competitor’s line chart or the candlestick chart, illustrate the same amount of data, the difference its structure compromises of X’s and O’s rather than lines candlesticks.
The P&F display data on the basis of X’s and O’s. The X represents a higher movement of the price and is called box size. While the O mentions the lower movement of the price and is knowns as the box size amount. The box size is based on an asset’s price and the trader’s sentiment.
On the chart, the X’s and O’s stack up against each other. Price reversals occur when X’s column changes to O’s column and vice versa.
The P&F calculations require two variables; one is the amount of box size, and the other is the reversal amount. The box size amount depends on a trader’s choice; it can be $1 or 1% if measured with ATR (average true range) indicator. ATR measures price volatility. The reversal amount is not fixed but should be three times greater than the box size. For example, if the box size amount is $1, then the reversal amount should be $3.
Renko charts and P&F charts depend on the box size amount for data presentation, and both are time-independent. However, Renko charts have bricks that create a series of boxes over a specifies period.
How to use the Point and Figure charts?
The P&F charts provide trading signals like any other chart. It defines key support and resistance levels and mentions exact entry and exit points.
As described earlier, the X’s signifies higher price movement forming resistance levels, while O’s represents lower price movement, creating support levels.
If the price continues to rise, the X’s will stack on top of each other, and if it declines, there will be a series of O’s. For example, let’s say the price of EUR/USD declines from 1.2945 to 1.2880, the P&F will show O’s columns.
Traders can take long positions after the emergence of X’s, and short positions after O’s with stop-losses close to the entry point. When there is a price reversal, the columns will shift, and traders can exit the trade.
One of the major advantages of P&F charts is it doesn’t depend on time. This makes it easier to filter false breakouts. Often time traders utilize P&F for filtering possible market noise. For the breakout to occur, it must move the box size amount.
Point and Figure charts trading strategy
The P&F charts can be used by short or long-term traders, as it can take weeks or even months for the trend to reverse. Therefore, the P&F trading strategy should be applied as a part of a trading strategy to suit your own individual needs.
Point and Figure charts buy strategy
- Locate the X’s column on the chart.
- Wait for the two or three X’s to form before entering.
- Enter the trade after the appearance of X’s.
- Set a stop-loss near the entry point.
- Exit the trade when the X’s column changes to O’s column.
Point and Figure charts sell strategy
- Locate the O’s column on the char.
- Wait for the two or three O’s to form before entering.
- Enter the trade after the formation of O’s.
- Set a stop-loss near the entry point.
- Exit the trade when the O’s column changes to X’s column.
Point and Figure charts conclusion
The Point and Figure charts can be an effective way to find entry and exit points for both short and long-term traders. Traders can also utilize the ATR indicator along on P&F charts to measure the price volatility.
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