Point & Figure chart is used to display the relationship between supply and demand of a particular asset through a series of columns made up of X’s and O’s. Point & Figure Charts are time-independent and focus primarily on an asset’s filtered price actions.
Point & Figure Charts do not plot the volume traded and their purpose is to indicate any supply and demand relationship changes, which are known as “breakouts”. Point & Figure Charts also make it easier to detect support and resistance levels, and any trends lines that may exist. Recognising the patterns that occur in Point & Figure Charts is key to utilising them.
While Point & Figure Charts do display dates or time on their x-axis, these are in-fact markers for the key price action dates and are not part of a time-scale. The y-axis is used as the value scale. The Xs represent rising prices, where demand overtakes supply (more buyers) and the Os represent falling prices, where supply overtakes demand (more sellers).
Before drawing a Point & Figure Chart, you first need to decide on the values you want to set for the box size and the reversal amount. You also need to choose, from what time point you want to take the price changes from: this could be the day’s closing price or it could be the day’s high or low depending on the direction of the previous column.
The box size determines how much the price needs to change before a new X or O symbol can be placed. This sets how much noise in the market you want to filter out of the chart by reducing the amount of minute price fluctuations displayed. So for example, if you set the box size to $1, any price increases or decreases less then this amount will be ignored, but if the price change is equal to or over $1, then a symbol will be placed on the chart.
These price changes are kept in one direction (either rising or falling) within a single column, and a single column can only contain either Xs or Os, not both. So if the price is on a rising uptrend (with Xs) then only Xs will be plotted in a column (this includes both price increases and decreases). It’s only once the predetermined reversal amount is hit that a new column can be started. So if you had a column of Xs and your reversal amount is $3, if a price drop of $3 or more occurs then you need to start a new column of Os to indicate that the direction of the market has changed into a declining trend. Same thing with a column of Os, if the price increase of $3, then the trend has reversed from falling to rising, and you can now plot on a new column.
The reversal amount affects the sensitivity of the chart: a smaller reversal amount would yield more price fluctuations, making the chart wider and providing more information what has occurred in the markets. However, a larger reversal amount would filter out insignificant price fluctuations, condensing the chart.
Numbers are sometimes also displayed in columns to indicate the start of a new month. 1-9 are used to denote January (1) through to September (9) and A, B and C used for October (A), November (B) and December (C).