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How to keep an eye on your stocks in just minutes — The brilliant simplicity of the Point and Figure chart
For the beginning chartist, Point and Figure (PnF) charts are one of the best places to start.
They are simple to construct and are one of the best methods for reducing noise. Traditionally, only the high and low prices of the day are used. Some days may not even have price movement wide enough to warrant marking the chart. So no action, no change to the chart.
Unlike other charts where everyday means adding data, with PnF charts there is no accounting for the passage of time. This can be a great benefit for the longer term trader or investor that wants to focus only on bigger moves.
Point and Figure charts use these basic rules:
Charts consist only of columns of X’s and O’s
As long as price continues in the direction of the prevailing column
It takes price movement of 3 boxes to reverse the column (traditionally, though other methods can be used)
Only two trendlines, always at a 45 degree angle
Bullish support line
Bearish resistance line
Here’s a look at the method of construction from Stockcharts.com
When the current column is an X-Column (rising):
Use the high when another X can be drawn and then ignore the low.
Use the low when another X cannot be drawn and the low triggers a 3-box reversal.
Ignore both when the high does not warrant another X and the low does not trigger a 3-box reversal.
When the current column is an O-Column (falling):
Use the low when another O can be drawn and then ignore the high.
Use the high when another O cannot be drawn and the high triggers a 3-box reversal.
Ignore both when the low does not warrant another O and the high does not trigger a 3-box reversal.
Patterns such as breakouts and triangles can be observed and used. And PnF charts have very clear definitions of buy and sell signals. A “buy signal” occurs when a column of X’s exceeds a previous column of X’s. And a “sell signal” occurs when a column of O’s exceeds a previous column of O’s.
It may make for a fairly rudimentary trading system. But if used within the proper framework of risk management and position sizing it has chance to be as profitable as it is simple.
So if you’re looking for way to get a quick picture of what your holdings or watch list tickers are doing go to your favorite charting software and look at a point and figure chart. And if you’d like to learn more about them you can dig in here.
***This is NOT financial advice. NOT a recommendation to buy, sell, or trade any security. The content presented here is intended for educational purposes only.