The Hindu Business Line : Tech School: Point and Figure

One of the merits of Point and Figure (P&F) chart is its straightforwardness in recognizing trend signals and great precision. These charts are designed to demonstrate the underlying demand and supply of a security. While most technical-analysis charts are inclined to be the open-high-low-close price charts, the closing price of the stock is emphasized in the Point and Figure chart.

An important factor in construction of Point and figure chart is the creation of the Unit of Price. It is the unit measurement of the stock price movement which is plotted on the chart. We had briefed in our prior tech school that the price movement in point and figure charts are represented by alternating columns of Xs and Os.

The X is plotted in a column as long as the price keeps rising, while O is plotted representing the declining price movement in the successive column. The representation of each X or O on the chart in known as box. Every chart has a setting called the box size. That is the extent to which the stock should move beyond the top of the current column of X’s or below the bottom of the current column of O’s before another X or O is added to that column.

The Reversal Amount is another important setting in the P&F chart. It decides the amount that the particular stock needs to move in the opposite direction before a reversal occurs. That is plotting down if we are in a rising column of X’s and moving up for a column of O’s. Whenever this reversal entrance is crossed, a new column is started plotting right next to the earlier one, only moving in the opposite direction. Let’s illustrate with an example, the Apollo tyres stock which is trading at Rs 20 by using Rs 1 as a unit measurement that is box size.

The reversal amount is three units for the stock. If you refer that Point and figure chart of the stock one can observe that the stock has not yet reversed as it is still trading within the 3 units of reversal amount. Apollo Tyres stock has to move beyond Rs 21, to plot an X in successive column. Another example of P&F chart is shown below, the Mastek stock which is trading at Rs 168 by using Rs 5 as a unit measurement that is box size and the reversal value is 3.

Another major merit of the P&F chart is the flexibility. The reversal amount can be increased to five units.

Moreover, using point and figure charts we can identify price patterns such as Double Tops and Bottoms, Bullish and Bearish Signal formations, Bullish and Bearish Symmetrical Triangles, Triple Tops and Bottoms.

— Yoganand D.

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