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Point and Figure Charts.What is Point and Figure?Point and Figure charts are simple and yet sometimes people have problems understanding them. So to begin with, let's define Point and Figure charts using "human" language. We will say that the "minimum" is a pattern on the stock chart where the price went down by N (points, dollars - whatever) and then up by N. So if we desided that N = $2 and stock dropped by 3 dollars and then went up by 2 dollars - we just had a minimum. Same with the maximum. So far so good. Now we can deside that when we had (just had) a minimum it is a good time to buy and when we just had a maximum - it is time to sell. Our oversimplified trading strategy would be something like that: If the stock goes up two dollars we buy and if the stock goes down two dollars - we sell. Note: this is only an example. Real strategies are usually much more complex. Does it mater if the minimum happened during one day or one year? Not from the point of view of our definition. So can we draw a chart in such a way that the time is not present in the picture? Because if we do, then we will be able to compare PATTERNS of the price movements REGARDLESS the time - we will have a timeless indicator. This is what Point and Figure charts are about. Creating Point and Figure chartsPoint and figure charts are time-independent. So you can create them for intraday trading as well as for the long-term buy and hold trading. Take the current stock price and decide what is the size of a "cell". Let's say it is $0.1 - just for an example. Now if the stock go UP 10 cents we put the "X" on the paper. If it go up another 10 cents, we put another X on top of the first one. If then the stock goes DOWN 10 cents we move one step (width of one character) right and put "O" below the last (topmost) "X". And so on. Let's take a look at the typical Point and Figure chart built by the Trader program for the GENZYME stock. 65.910756 ..............X........ 63.267224 ..............XO....X.. 60.734351 ............X.XOX...XO. 58.307504 ............XOXOXO..XO. 55.982244 ............XOXOXO..XO. 53.754320 ....X.......XO.OXOX.XO. 51.619657 ....XO......X..O.OXOXO. 49.574351 ....XO......X....OXOXOX 47.614662 ....XOX.X.X.X....OXO.OX 45.737005 ..X.XOXOXOXOX....OX..OX 43.937946 ..XOXOXOXOXOX....OX..OX 42.214197 ..XOXO.OXO.OX....O...OX 40.562603 ..XO...OX..OX........O. 38.980145 X.X....OX..O........... 37.463929 .OX....O............... 36.011182 .OX.................... 34.619247 .OX.................... 33.285578 .OX.................... 32.007736 .OX.................... 30.783385 .O..................... 29.610285 ....................... Now compare it to the actual chart:
There is a pattern here ;) Why use Point and Figure charts? First of all it is a ready to use trading system. You don't have to guess. If chart does this and this - buy (or sell). Second reason is - the results are presented in form of the patterns that are easily recognizable both by humans and by the computer system (the Trader program can generate buy and sell signals based on those patterns). What are the patterns? Let's take the well-known "head and shoulders" pattern when the chart of a stock price looks like 3 peaks, the middle one (head) higher than the left and right (shoulders). The chart is going up, it means we have "X" characters building one
on top of another:
Then the price is going down, so we have "O" characters ("."
represents an empty space):
It was the left shoulder. Then the head (that is another, higher
peak):
And finally, the right shoulder:
This is a pattern. When we see this pattern on the chart - it is a SELL signal. And as it is always the same size (no time) and shape (X by Y characters) the computer can easily recognize it, too. What are the other patterns?Anything or almost anything we use in chart pattern analysis can be translated into the Point and Figure. My favorite are: Minimum:
Single bottom:
Maximum:
Single simple top
There are about twenty "recognized" patterns and many more "questionable" ones. Trader softwareIt will find best parameters for your indicators (like cell size for Point and Figure) and generate buy and sell signals for you. Together with the Stock downloader program you can use Trader to test your system on historical stock prices. The Trader implements the "variable cell size" for the Point and Figure charts - a feature that makes an algorithm's performance much more stable when the stock price changes dramatically over period of time.
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