Point and figure charts represent price movements using columns of X's and O's without a time component. Each box represents a specific price change threshold. Various box size settings like percentage or ATR scaling filter out small price fluctuations. Trends are identified by successive X or O columns, with reversals requiring a price move of the reversal amount. Support and resistance levels appear as horizontal rows. A 45-degree trendline can also be drawn. Price targets are estimated using vertical or horizontal box counts.

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.