3. 01
DISCLAIMER
RISK DISCLOSURE
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employees or content providers.
A FOREX POINT AND FIGURE
CHART TUTORIAL
4. 02
A FOREX POINT AND FIGURE
CHART TUTORIAL
Point and figure charts, unlike just about any other type of chart used in
forex analysis, are not based on the exchange rate’s action over time
but are drawn exclusively based on the exchange rate of a currency
pair.
Having no time scale, the point and figure chart therefore does not
advance in time, but instead the exchange rate data is entered as short
term and intermediate term trends change. The exclusion of volume,
time and open/close data leaves only the pure exchange rate action to
base technical analysis upon.
With the exchange rate as the only analytical factor, point and figure
charts reveal a clearer more concise picture of a currency pair’s trend,
breakouts and support and resistance levels. For a number of reasons,
the point and figure chart is especially suitable for analysis of the forex
market, and they have become the chart of choice for many profession-
al forex traders and market makers working at major banks.
INTRODUCTION
5. A FOREX POINT AND FIGURE
CHART TUTORIAL
03
HISTORY
The point and figure chart has been around since the late 19th century
and was first mentioned by an author named Hoyle in his 1898 book,
“The Game in Wall Street”. The charting technique was later mentioned
by Richard Wyckoff in his 1910 book, “Studies in Tape Reading”. In 1933,
Victor Devilliers wrote the first complete book on the technique, “The
Point and Figure Method of Anticipating Stock Price Movements” and
later with Owen Taylor he wrote, “Devilliers and Taylor on Point and
Figure Charting”.
Jeremy Du Plessis, an author who has written a number of books on
point and figure charting, describes the development of the charting
method from a recording system. In the late nineteenth century,
traders would keep track of stock prices by notating them in columns.
Once they noticed patterns in their price records they began to refer to
the notations as fluctuation charts and subsequently as figure charts.
Instead of numbers, some traders began entering Xs and the charts
became known as point charts. Traders then began using both point
charts and figure charts together and started calling them their point
and figure charts, which is, according to Du Plessis, the origin of the
name. Today’s point and figure charts are typically plotted with Xs and
Os. Columns of Xs represent rising prices, while Os in a column
represent declining prices.
6. A FOREX POINT AND FIGURE
CHART TUTORIAL
04
POINT AND FIGURE BASICS
In essence, a point and figure chart can be constructed on graph paper
and consists of alternating columns of boxes. These boxes have a pip
value and are either labeled with an O for a decrease in the exchange
rate, or an X for an increase in the rate. The box is assigned a specific
pip value and labeled when the currency pair trades up or down that
amount. For purposes of illustration, a 10 pip box on an exchange rate
will be used.
The other key element for point and figure charting is the reversal. For
example, assuming the box size is ten pips and the reversal value is
three. This means that in order for another column to be started, a
thirty pip move in the opposite direction for the exchange rate — or
three boxes - must occur for a new column entry to be made next to the
previous column.
For a downside reversal, three Os are entered in the box immediately
under the top X in the X column. If an upside reversal has happened,
three Xs are entered immediately in the box above the bottom O of the
previous column to illustrate the reversal. As more transactions arise,
the columns of Xs and Os begin to form patterns.
In forex trading, a three point reversal with a ten pip box size would be
considered optimal for most currency pairs. Any movement outside of
those parameters would constitute noise and would therefore be
ignored.
As the exchange rate fluctuates within the three box reversal limit, the
most recent column remains intact, unless the exchange rate
increases another ten pips. At that point, another X is added on top of
the previous one.
The same is true in a falling market. The graph remains the same
unless the rate drops another 10 pips, then another O is added. In either
case, if the exchange rate moves up or down 30 pips then another
column is started and three Xs or Os are entered.
7. A FOREX POINT AND FIGURE
CHART TUTORIAL
05
USING POINT AND FIGURE CHARTS
Signals generated by point and figure charts are typically
straightforward. Using them to initiate or liquidate positions involves
identifying breakout patterns in the market.
Because of the numerous breakout opportunities in the forex market,
this type of chart is ideal for identifying major reversals in the market.
This is one of the reasons why so many professional traders use these
charts.
Point and figure charts accurately reflect levels of support and
resistance, which can then be used by the point and figure analyst to
identify tradable breakout opportunities and open positions.
Trendlines can also be discerned on point and figure charts and - unlike
candlestick and bar charts - they are always drawn up at a 45 degree
angle and down at a 135 degree angle using either an X and the next O
for a downtrend line or an O and the next X for an uptrend line.
8. A FOREX POINT AND FIGURE
CHART TUTORIAL
06
DOUBLE AND TRIPLE TOPS
AND BOTTOMS
In traditional technical forex analysis, a double top generally signals the
market is prepared to reverse and sell off, while a double bottom
typically indicates that the exchange rate has made a significant low
and will likely trade higher in future.
A point and figure double top and bottom can have completely different
interpretations. For example, on a point and figure chart, a double top
can be seen as a reliable upside breakout indicator. If the double top is
breached by just one X entry, this signals a breakout to the upside. The
same is true for a double bottom, one more O entry and the breakout on
the downside is confirmed. Nevertheless, if the neckline breaks
instead, it would generate a bearish signal.
A triple top or bottom has the same implications as a double top or
bottom, but with even more certainty in the declining trend should a
downside breakout occur. As a rule of thumb, the more a resistance or
support level is challenged in a point and figure chart, the more
meaningful the breakout once the level has been breached.
9. A FOREX POINT AND FIGURE
CHART TUTORIAL
07
TRENDLINES AND TRIANGLES
Because of the strictness in the point and figure chart entry protocol,
trendlines and triangles set up much less often than with candlestick or
bar charts. Also, the 45 and 135 degree angles for trendlines do not
occur often, but when one forms on the upside, an opportunity for a
breakout to the downside lies just below the lowest O on the downtrend
column.
By the same token, a breakout on the upside for a downtrend is just
above the highest X in the uptrend column. The reliability of a breakout
on a point and figure chart generally surpasses that of either
candlestick or bar charts.
Triangle formations, while not as prevalent as in candlestick and bar
charts, tend to form over time in point and figure charts. These patterns
generally provide excellent trading opportunities when recognized and
generally the breakouts tend to be decisive when they occur.
10. A FOREX POINT AND FIGURE
CHART TUTORIAL
08
AREAS OF SUPPORT
AND RESISTANCE
Tops and bottoms which remain unbroken become levels of support
and resistance. Point and figure analysts look for breakouts from well
defined trendlines, which are often critical points and excellent levels to
establish or liquidate positions.
Generally, the more concentrated in Os and Xs at the level of support or
resistance, the stronger the level tends to be and consequently the
more meaningful the breakout when the level is breached. While false
signals may arise in point and figure charts, when long standing levels
of support or resistance are breached, the breakout has a high
probability of being sustained.
11. A FOREX POINT AND FIGURE
CHART TUTORIAL
09
POINT AND FIGURE PATTERNS
In addition to the previously mentioned patterns, point and figure
analysts keep an eye out for a number of other bullish, bearish and
neutral chart formations. A partial list of these point and figure chart
patterns follows.
Bullish Patterns
• Triple Top - formed by three rallies to a certain level, on the third
rally, the resistance is penetrated.
• Ascending Triple Top - variation of the triple top, with the difference
being that each consecutive top is higher than the previous one.
• Upside breakout of Bullish Resistance - variation of the Ascending
Triple Top, with the addition of a fourth top higher than the previous
top.
• Upside breakout of Bearish Resistance - a pattern of consecutive
lower highs, and when resistance is penetrated, a buy signal is
generated.
• Spread Triple Top Breakout - variation of the triple top, except that
the third rally fails and the fourth move up breaks the resistance
level.
Bullish Reversal Patterns
• Double Bottom - two lows at the same level, and after the second low
is made, the rate then breaks the neckline and a bullish signal is
generated.
• Triple Bottom - three lows at the same level, and after the third low
is made, the rate then breaks the neckline and a bullish signal is
generated.
• Bullish Rectangle Reversal - downtrend shows a consolidation, and
then resistance is penetrated on heavy volume to generate a bullish
signal.
12. A FOREX POINT AND FIGURE
CHART TUTORIAL
10
POINT AND FIGURE PATTERNS
• Inverted Head and Shoulders - the rate forms a low in the first
column followed by a consolidation, the rate then makes a second
low followed by another consolidation period, the right shoulder is
now formed with a buy signal generated once the rate penetrates the
neckline.
Bearish Patterns
• Triple Bottom - formed by three down columns with the last one
dropping past the line formed by the first two.
• Descending Triple Bottom - a variation of the triple bottom, with the
exception that each consecutive low is lower than the previous one.
When the rate declines past the support level, a bearish signal is
generated.
• Spread Triple Bottom Breakout - another variant of the triple
bottom, with the exception that the third fall fails to penetrate the
support level. On the fourth fall, the rate trades lower than the
support level to generate a bearish signal.
• Downside Breakout of Bullish Support - a series of consecutive
higher lows. When the rate penetrates the support level, a bearish
signal is generated.
• Downside Breakout of Bearish Support - a variation of the
descending triple bottom, with the exception of an upside bias. The
bearish signal is generated once the support level is breached.
Bearish Reversal Patterns
• Head and Shoulders - the rate makes a high in the first column,
followed by a second high with a period of consolidation. The right
shoulder then develops followed by a selloff with high volume on the
last move downward, which penetrates the support level and
generates a bearish signal.
13. A FOREX POINT AND FIGURE
CHART TUTORIAL
11
POINT AND FIGURE PATTERNS
• Double Top - consists of two highs at the same level, with the second
high penetrating the neckline and generating a bullish signal.
• Triple Top – consists of three highs at the same level, after the third
high is made, a bearish column breaks the neckline thereby
generating a bearish signal.
• Bearish Rectangle Reversal - after a period of consolidation, the
support level is breached, thereby generating a bearish signal.
Trend Reversal Patterns
• Double Top - two highs at the same level, and after the second high
is made, the rate breaks the neckline on the downside thereby
generating a bearish signal.
• Double Bottom - two lows at the same level, and after the second low
is made, the rate breaks the neckline on the upside to generate a
bullish signal.
• Head and Shoulders - the rate makes a high in the first column
followed by a consolidation period. A second high is formed followed
by another consolidation; subsequently, the right shoulder is formed
followed by a selloff below the consolidation level that generates a
bearish signal.
• Inverted Head and Shoulders - the rate makes a low in the first
column followed by a consolidation period. A second low is formed
followed by another consolidation; subsequently, the right shoulder
is formed followed by a rally above the consolidation level to
generate a bullish signal.
• Bullish Rectangle Reversal - a period of consolidation after a selloff
forms a rectangle, and when the topside resistance is penetrated, a
bullish signal is generated.
14. A FOREX POINT AND FIGURE
CHART TUTORIAL
12
POINT AND FIGURE PATTERNS
• Bearish Rectangle Reversal - a period of consolidation after a rally
forms a rectangle, and when the lower end support is penetrated, a
bearish signal is generated.
Neutral Patterns
• Flag - initially, a large gain is followed by a consolidation period, then
another bullish column forms, breaking the 45 degree resistance
level and generating a bullish signal.
• Inverted Flag - a large decline is followed by a consolidation period,
then another bearish column forms to breach the support level and
generate a bearish signal.
• Pennant - a variation on the Flag, this formation has the same rules
as the Flag with the difference being that the formation after the
sharp move is triangular in shape.
• Inverted Pennant - Follows the inverted Flag rules with a triangular
consolidation after the sharp move.
15. A FOREX MARKET OVERVIEW
LICENSES & REGULATIONS
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