A student recently emailed me and asked if there was a way to use Point and Figure charting with Online Trading Academy’s core strategy. I decided to take this week’s article to explain that charting style and how we can use it.

Long before we had computers to chart price, traders were making a living and doing it by watching price movement. One of the earliest types of charts was called point and figure charting (P&F). It started from traders who would tick off prices as they watched the trading. Eventually the ticks changed to X’s and O’s to note movement in price and even see trends.

Today, many chartists have switched to candlestick charting to make their decisions to buy or sell. A drawback to this style of charting is that many people are prone to exiting early from profitable trades when they see small pullbacks or corrections. An advantage of point and figure charting is that it allows the trader to see the trend and stay in the trend even through minor corrections. For this advantage, we may sacrifice some profits with a larger stop but with the larger profit potential it may be worth it.

Another interesting feature of point and figure charts is that it does not take time into account when charting. On a candlestick chart, you will have a candle for every period. For instance, on a five minute chart, you would have a candle every five minutes whether the price moved or not. In a P&F chart, a new notation is made only when price moves by a certain amount. If there is no trading or if price does not move enough, no notation is made.

To create the chart, you will use an “X” to note when prices rise by a certain amount and an “O” when they decline by an amount. You only put either X’s or O’s in a column. If you need O’s due to a reversal in price, you would start a new column. You do not put X’s and O’s in the same column. You must first decide the minimum amount of movement to note. This is referred to as the box size. You can set the box size for anything you would like but remember the smaller the size, the more sensitive the chart will be. This may be good for short term traders but it can cause you to overreact to slight corrections. As a rule of thumb, you should set the box size at about 1% of price. You could use 2% when charting the indexes like the Sensex and the Nifty.

You also need to decide the reversal setting. This will be the multiple of the box size that would create a reversal signal. For instance, if you set the box size at 100, a 1×1 chart would change from a column of X’s to a column of O’s when price reversed by Rs. 100. On a 1×3 chart, you would continue to mark X’s for the upward movements until you have price reverse by at least Rs. 3 (Rs. 100×3). Once that happens, you would start a column of O’s to the right of the previous column.

India Markets

The larger reversal size will filter our many small corrections that might have otherwise scared traders out of positions.

Buy and sell signals can be as simple or as complex as you would like. You can take a simple buy signal when a column of X’s rises above the previous column of X’s. You could stay long until a sell signal has been generated. The simple sell signal comes when a column of O’s breaks below a previous column of O’s.

India Markets

When we trade, we should know at least three things about the position before we take it. We need to know our entry, the stop, and the target we hope to achieve. A point and figure chart can offer all of that to us. We can place our stops for longs just under the last column of O’s. As long as there is no reversal that breaks that low, we stay in the trade.

India Markets

The system would be similar for shorts. We would enter a short on a sell signal and place our stop above the previous column of X’s. We would stay in our short position until we have breeched that previous high.

India Markets

If we happen to be long or short in a large move, we may not want to wait for a large reversal to exit. If we were to wait, we may give back too many profits. So instead of waiting for the typical sell signal, stop yourself out when you have the first three box reversal.

India Markets

For the target price, we can use a horizontal box count. When prices move, they usually originate from a basing area. We can project the width of this basing to offer probability targets for the trend when we are in. The target does not have a timeframe and can take time to reach. Remember, only price movement matters, not the passage of time.

India Markets

If we are using a larger reversal size, 100×3, 200×3 or so, we can still use a horizontal projection. In this case, we would multiply the horizontal box count by the box size and the reversal size to determine the projection length.

India Markets

So these are the basics of point and figure charting. Next week I will explore more advanced techniques, patterns, and how you can combine this type of charting with Online Trading Academy’s Core Strategy for your trading. Until then, trade safe and trade well.

Learn to Trade Now

Note: All information on this page is subject to change. The use of this website constitutes acceptance of our user agreement. Please read our privacy policy and legal disclaimer. Opinions expressed at FXstreet.com are those of the individual authors and do not necessarily represent the opinion of FXstreet.com or its management. Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

Education feed Join Telegram

Editors’ Picks

EUR/USD dribbles at 20-year low around 0.9700, ECB vs. Fed, Italy’s election results eyed

EUR/USD dribbles at 20-year low around 0.9700, ECB vs. Fed, Italy’s election results eyed

EUR/USD bears take a breather at the lowest levels since September 2002 amid early Monday morning in Asia. The major currency pair slumped the most in eight days on Friday while refreshing the multi-year low with the 0.9667 number.

EUR/USD News

GBP/USD licks its wounds at record low amid pessimism over UK, risk-aversion

GBP/USD licks its wounds at record low amid pessimism over UK, risk-aversion

GBP/USD consolidates intraday losses around the recently flashed record low near 1.0340, as bears fear the BOE intervention. Hawkish Fedspeak, pessimism surrounding the UK economy and broad risk-aversion add strength to the bearish bias.

GBP/USD News

USD/JPY marches towards 144.00 on firmer yields, risk-aversion ahead of Fed Chair Powell’s speech

USD/JPY marches towards 144.00 on firmer yields, risk-aversion ahead of Fed Chair Powell’s speech

USD/JPY renews intraday high around 143.60 as Tokyo opens for Monday, extending Friday’s recovery moves. In doing so, the yen pair also reverses the previous day’s pullback from the 24-year high, triggered by Japan’s intervention to defend the national currency.

USD/JPY News

Editors’ Picks

GBP/USD licks its wounds at record low amid pessimism over UK, risk-aversion

GBP/USD licks its wounds at record low amid pessimism over UK, risk-aversion

GBP/USD consolidates intraday losses around the recently flashed record low near 1.0340, as bears fear the BOE intervention. Hawkish Fedspeak, pessimism surrounding the UK economy and broad risk-aversion add strength to the bearish bias.

GBP/USD News

AUD/USD renews two-year low as bears poke four-month-old support around 0.6500

AUD/USD renews two-year low as bears poke four-month-old support around 0.6500

AUD/USD reverses the early Asian session corrective bounce on Monday as it drops back towards 0.6500. The Aussie pair pokes the support line of a 4.5-month-old descending trend channel. May 2020 low can lure sellers on defying the bearish channel formation.

AUD/USD News

EUR/USD dribbles at 20-year low around 0.9700, ECB vs. Fed, Italy’s election results eyed

EUR/USD dribbles at 20-year low around 0.9700, ECB vs. Fed, Italy’s election results eyed

EUR/USD bears take a breather at the lowest levels since September 2002 amid early Monday morning in Asia. The major currency pair slumped the most in eight days on Friday while refreshing the multi-year low with the 0.9667 number.

EUR/USD News

Gold clings to 29-month bottom near $1,650, focus on Ukraine, Fed’s Powell

Gold clings to 29-month bottom near $1,650, focus on Ukraine, Fed’s Powell

Gold price licks its wounds at a two-year low, around $1,645 during Monday’s Asian session, as bears take a breather after the biggest daily fall in a week ahead of the key catalysts. Also testing the metal prices could be the mixed headlines surrounding Europe and Russia.

Gold News

Ethereum: Assessing the possibility of a post-Merge rally

Ethereum: Assessing the possibility of a post-Merge rally

Ethereum price trades at $1,323 on Sunday, several days after sliding to $1,200. It was a surprise that the largest smart contracts token would give up most of its gains during and after the much-publicized Merge.

Read more

RECOMMENDED LESSONS

7 Ways to Avoid Forex Scams

The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?

What Are the 10 Fatal Mistakes Traders Make

Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

Strategy

Money Management

Psychology