Point and Figure Charts
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Unlike most other investment charts, point and figure charts do not present a linear representation of time. Instead, they show trends in price. The aim of point and figure charting is to filter out the "noise" (unimportant price movement) and focus on the main direction of the price trend.
Point and figure charts are usually used for longer term price movements. Having said that they can be used very successfully to day trade by clearly identifying the key points of supply and demand. They are very effective at keeping you on the right side of the market. Point and figure charts can do a really good job to spot very good trading opportunities on a trade and trend market. Point and figure charts are close relatives to three line break, renko and kagi charts which all do not have a fixed timeframe. This makes you trade only the important moves of the market, minor moves are discarded because of the limited gain potential.
There are two typical ways to plot point and figure charts - using closing prices, or with high/low prices. The most common method nowadays is high/low prices of a specific timeframe normally daily prices. The close (EOD) method was used until 1947 when A.W. Cohen invented a different system to work with point and figure charts using high/low prices. A.W. Cohen also invented in 1955, while working for Chartcraft, the bullish percent indicator BP which is a tool to gauge the market breadth of a specific market or index.
He used for the calculation of the BP high/low prices of the day due to the fact he invented the high/low system on point and figure charts. But it is also possible to calculate the BP with close only prices but the outcome are two different BP charts. Closing prices are useful when charting price movement for funds or suchlike where there is no real way to get the intraday prices for that fund. But we can use the close only prices also for every kind of market because sometimes the intraday movement of prices can be confusing. If you take into account that point and figure charting in the last part of the 19 th century and the first part of the 20 th century was used to record price movement of tick charts the close only price would be one tick to be specific our last tick for the trading day.
Point and figure charting is said to have had its origins in the US during the late 1900s and with the first book appearing to by deVilliers, V. (1933), The Point & Figure Method of Anticipating Stock Price Movements showed that these charting technique was already known by insiders and stock traders. Point and figure charts where already there in the trading rooms for the purpose to record daily tick movements of stocks when Charles Dow was beginning to create his famous index. Numerous books have been written during the 20th century though limited work has appeared in the more rigorous refereed academic journals.
Ricky Schmidt
January 13, 2007
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