A point and figure chart is a technical analysis tool that tracks asset price movements on a grid while entirely ignoring the passage of time.
Understanding point and figure charts
Point and figure charts consist of columns of letters, specifically Xs and Os. An X represents a rising price, and an O represents a falling price. Unlike traditional candlestick or bar charts that plot price against specific time intervals like days or hours, point and figure charts only record data when the price moves by a predetermined amount. This predetermined amount is called the box size. If the price does not move by the box size, the chart remains unchanged regardless of how much time passes.
These charts also use a reversal amount, which dictates how much the price must move in the opposite direction to start a new column. A common setting is a three-box reversal. If the box size is set to $1, a rising asset must fall by $3 to trigger a new column of Os. This filters out minor price fluctuations. Technical analysts use this filtering to identify underlying trends and basic support or resistance levels without the noise of daily market volatility.
The method originated in the late 19th century. Traders initially used numbers to track prices on graphing paper, which later evolved into the X and O system. Today, these charts are applied to various financial markets worldwide, including global equities and commodities. Elephants using point and figure charts look for specific geometric patterns, such as double tops or triple bottoms, to make trading decisions.
Example
Suppose Elephants are trading shares of a hypothetical agricultural company called Savannah Peanut Corporation. A trader sets up a point and figure chart with a box size of $2 and a three-box reversal of $6. The stock is currently trading at $50. Over the next week, the price creeps up to $51. Because the movement is less than the $2 box size, the chart does not change.
The following week, strong demand for peanut crops pushes the stock to $54. The trader adds two Xs to the current column, representing the moves from $50 to $52, and $52 to $54. A month later, a poor harvest report causes the stock to drop to $48. This is a $6 drop from the $54 peak, which meets the three-box reversal requirement. The trader starts a new column to the right, drawing three Os to represent the downward price movement.