Stock Point and Figure Charts

Stock point and figure charts plot only the price movements of a stock and do not include the passage of time in its detailed information. While it is not well known or used by the average investor, it is still relevant and has a long history of use dating back to the first technical traders.

A stock point and figure chart removes the insignificant price movements, or noise, in the stock which can distort traders' views of the price trends. These types of charts also try to neutralize the skewing effect that time has on chart analysis.

Understanding Stock Point and Figure Charts

Stock point and figure charts use a series of Xs and Os. The Xs represent upward price trends and the Os represent downward price trends. Numbers and letters are also included in the chart, but they aren’t used to track time. The sole purpose of the alphanumerical information is to represent the month(s) in order to provide investors with an idea of the date.

Each box on the chart represents the price scale, which adjusts depending on the price of the stock. The higher the stock's price, the more each box represents (on most charts where the price is between $20 and $100, a box represents $1, or 1 point for the stock).

The other significant aspect of a stock point and figure chart is the reversal criteria. It is usually set at three, but it can also be set according to the chartist's discretion. The reversal criteria indicates how much the price has to move away from the high or low in the price trend to create a new trend or, in other words, how much the price has to move in order for a column of Xs to become a column of Os, or the other way around. When the price trend has moved from one trend to another, it shifts to the right, signaling a trend change.

Point and Figure Chart

If you have an interest in stock point and figure charts and technical analysis, you may want to consider signing up for a risk-free 14 day free trial of SmarTrend – and take the guesswork out of your trading.

Next: Technical Analysis: Chart Patterns