# Section 2 - Chapter 15 - Point & Figure Trading Strategies

Dean at Corporate PGDM um Professional Training Academy
23. Mar 2023
1 von 21

### Section 2 - Chapter 15 - Point & Figure Trading Strategies

• 1. Module - 25 Point & Figure Charts CMT LEVEL - I
• 2. Point & Figure Charting •Point & Figure charts consist of columns of X's and O's that represent filtered price movements. •X-Columns represent rising prices and O-Columns represent falling prices. •Each price box represents a specific value that price must reach to warrant an X or an O. •Time is not a factor in P&F charting; these charts evolve as prices move. •No movement in price means no change in the P&F chart.
• 3. Point & Figure Charting • Each column represents an uptrend or a downtrend of sorts. Each X or O occupies what is called a box on the chart. Each chart has a setting called the Box Size, which defines the price range for each box. • Each chart has a second setting called the Reversal Amount, which determines the amount that a stock needs to move in the opposite direction to warrant a column reversal.
• 4. Box Scaling Traditional Method Percentage Box Scaling Dynamic - ATR Scaling User Defined Box Scaling
• 5. Box Scaling Percentage box scaling uses box sizes that are a fixed percentage of the stock's price. For example, if a chart used 5% scaling and the stock's price is \$100, the box size for that part of the chart will be \$5.00. •Traditional box scaling uses a predefined table of price ranges to determine what the box size should be.
• 6. Box Scaling •Dynamic (ATR) scaling bases the box size on the daily Average True Range (ATR). The default is set at 20 days. However, one should take care with this setting because it changes as the ATR changes. Prior signals may disappear as ATR changes the box size. •User-Defined box scaling allows users to set the box size. A larger box size will result in more filtered price movements and fewer reversals. A smaller box size will result in less filtered price movements and more reversals.
• 7. Point & Figure Charting Advantage •P&F charts provide a unique look at price action that has several advantages. P&F charts: •Filter insignificant price movements and noise •Focus on important price movements •Remove the time aspect from the analysis process •Make support/resistance levels much easier to identify •Provide automatic and subjective trend lines
• 8. Introducing the 1-Box, 3-Box and 5-Box Reversal Charts • The point and figure chart considers the ATR(14) range a 1-box. Therefore, to reverse a falling or rising column, the price needs to exceed 1-box. Or, one time the ATR(14). • But even this method fell out of favour. In the early 1950s, the 3-box reversal charts became popular. It means that the chart plots an opposite sign only when the price reverses three times the distance shown by ATR(14). • Moreover, some traders used 5-box reversal patterns too. If you want, the more significant the timeframes we see on the candlestick charts are the equivalent of 3-box and 5-box reversal charts. • Such developments transformed the point and figure trading theory into a long-term analysis tool. Suddenly, investors of all sorts and traders interested in the bigger picture started using this approach too.
• 9. Trading with the 3-Box Point and Figure Reversal Chart • The 3-box reversal chart stood the test of time as the most widely used one. For this reason, the standard setup for today’s point and figure chart has: - ATR (14) - 3-box reversal • So, the setup for a point and figure chart considers the box size and the reversal condition. • There are many ways to use the 3-box point and figure reversal chart. From standard interpretations (moving averages, Bollinger Bands, Parabolic SAR) to alternative ones (internal lines), traders interpret markets more accurately using point and figure trading.
• 10. Point & Figure Chart – Support Level • A support level is a level at which investors and traders alike believe prices will start to move higher after hitting the support mark. • Have a look at the three O's in the example above to see what this means. • A horizontal row of O's is what you are looking for when zeroing in on a trend reversal and an uptrend to begin.
• 11. Point & Figure Chart – Resistance Level • A horizontal row of X's marks the resistance levels you need to be looking for in the P&F charting study. • Studies of trendline have shown that a break through resistance levels generally occurs with great gusto – that is, with big volume and a rapid increasing stock price.
• 12. Point & Figure Trendline • According to the theory, when the time doesn’t distort the price action anymore, the rising and falling angle of a market is close to 45-degrees. • If back in time traders updated the charts by hand, today’s trading platforms allow finding the angle very quickly. • Here are some steps to use for finding such internal lines: - start from a recent high or low - mark it with a horizontal line - place a vertical line so that the two form a 90-degree angle - use a regular trendline and divide the 90-degree angle into two equal parts • Some trading platforms offer trend lines that automatically show the angle. If that’s the case, just make sure the 45-degree angle starts from a top or bottom.
• 13. Point & Figure Trendline
• 14. How to Trade 45-Degrees Internal Lines • In a bearish trend like the one above, the market keeps forming lower lows. And, at the same time, the bounces don’t break the previous lower highs. • the point and figure price action breaks the 45-degrees internal line, in reality, it doesn’t. The rules of a trend remain in place. • In other words, the high on every column of X’s does not exceed the highs in the O’s. Hence, the bearish trend resumes, despite the internal line’s break. • Remember, it guides the price action. As such, it doesn’t act like a regular trendline.
• 15. Other Ways to Trade with Point and Figure • The 45-degrees internal lines are, by far, the most critical development in this theory. Since the 3-box reversal became the standard, the internal lines stretch for many years, offering traders the full picture. • But they are not the only way to trade point and figure charts. Here are some other methods, for you to be aware of: • finding time horizons for derived targets • traders apply the time element for a trade, closing it if the time to reach a target expires • using moving averages with point and figure charts • the classic golden and death crosses work • using the Wilder’s parabolic SAR indicator • the SAR stands for stop and reverse, and, when used on columns, is very efficient
• 16. Other Ways to Trade with Point and Figure • If the issue is rising in price and we have an uptrend in place with at least three X's, we believe that demand has overcome supply. • The reverse, when that chart gives us three O's, indicates supply has overcome demand. • P&F charts show us the establishment of trends, trend reversals and the supply and demand of charted issues.
• 17. Point and Figure Price Objectives • Point-and-figure chartists forecast trading prices after a breakout by using the box count, either vertically or horizontally. However, vertical projections work more often than horizontal projections. • In point-and-figure charting, you buy when the new price surpasses the highest X in the previous X column, and you sell when the new price surpasses the lowest low O in the previous O column. When the price surpasses a previous high or low, you have a breakout.
• 18. Price Objectives – Vertical Counts Point-and-figure chartists create forecasts in each case with an ingenious version of momentum. Follow these steps to do it: 1) Find the bottom of the last X (upward) column if you have an upside breakout (or the bottom of the lowest X column if you suspect a reversal to the upside). 2) Count the number of boxes in the column - Say you have four boxes. 3) Multiply the number of boxes by your reversal amount, say the standard three - 4 x 3 = 12 4) Multiply that product by the box size - Say you use the standard, \$1 = 12 x \$1 = \$12 5) Add the product to the lowest low in the starting column to get your new price target - If the lowest low was \$10, you add \$12, and your price target is now \$22.
• 19. Price Objectives – Vertical Counts • The price objective is only a guide. • The actual new high may fall short of \$22, or it may be a great deal more than \$22. • You don’t automatically sell at \$22 if the price is still making new highs. • But you may want to evaluate the risk-reward ratio in terms of the price projection (the reward) and the lowest low in the starting column (where you may place your initial stop).
• 20. Price Objectives – Horizontal Counts • You use a horizontal count to project the ending price of a breakout after a period of consolidation. • Say the price has been going mostly sideways for some period of time. • Yes, it has alternating X and O columns, but your eye can detect a base, or bottom formation. • This figure shows a base forming after a five-column downtrend ahead of an upside breakout.
• 21. Price Objectives – Horizontal Counts 1) Identify the number of columns in the base, which is the sideways period before the breakout - Exclude the breakout column from this number. In this example, say you identify five columns. 2) Multiply by the number of columns in the base by the reversal amount you choose - Say you use the standard three-box reversal = 5 x 3 = 15 3) Add the product to the lowest low in the base to get a price target. - Say the lowest low is \$10. Now you have a price target of \$10 + \$15 = \$25.