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Tutorial 10 - Point and figure charts

Tutorial 10 - Point and figure charts

Executive Summary

After completing this tutorial, the technician will understand how point and figure charts are constructed, as well as how to recognise some chart formations and how to use trend lines on point and figure charts. One of the main uses of point and figure charts is to determine price objectives. We will discuss the merits of both the horizontal and the vertical price counts.

Introduction to technical indicators

Point and figure charts are one of the oldest charting techniques in existence, and were the first method of technical analysis used to track share prices. They were developed in the stock market with the specific requirements of share trading in mind, and investors who favour this method of analysis maintain that it is the clearest and most unequivocal form of technical analysis.

Unlike bar charts and line charts which are two dimensional, point and figure charts are based on price only, making them one dimensional - they do not take into account time or volume.

The lack of a time constraint gives point and figure charts the advantage of being able to reveal the nature of share price movements over extended time periods. It is generally used to identify periods of consolidation, as well as set price objectives based on chart formations.

Constructing a point and figure chart

The chart is constructed using vertical rows of X's and O's to indicate rises and falls in the share price respectively. When the price of a share goes up, the price rise is indicated by a vertical row of X's.

E.g.: If the share price of ABC Ltd goes up from 10c to 70c, the rise in price will be indicated by a vertical row of X's as follows (bold column):

P & F Charts - Share price going up

When the price of a share goes down, the price fall is indicated by a vertical row of O's.

E.g.: If the share price of ABC Ltd declines to 40c, the drop in price will be indicated by a vertical row of O's in the next column (the column immediately to the right) as follows (bold column):

P & F Charts - Share price going down

It is therefore important to be able to draw a distinction between a continuation of a current trend, and the beginning of a new trend.

We would call the point and figure charts in our examples "5 x 3" charts.

  • The "5" representing the price change represented by each block; and
  • The "3" representing the fact that it is a 3-point reversal chart.

Also bear the following points in mind when drafting a point and figure chart:

  • When embarking upon construction of a point and figure chart cognisance should be taken on the highest and lowest recent share price, in order to estimate the price range we will require to plot our chart. The price range will centre the chart on the paper.
  • It is very difficult to construct a point and figure chart using a logarithmic scale, as the squares at the top become too small. An arithmetic chart is usually used, but one can compensate for its inherent disadvantages, to some extent, by progressively altering the scale (e.g. assign a value of 2c per block between 0c and 100c, 5c per block between 100c and 300c, and 10c per block between 300c and 600c). While not strictly speaking as accurate as a true logarithmic scale, this method is still preferable to an unadjusted arithmetic scale.
  • A disadvantage of point and figure charting is that no account is taken of the volume on which the price changes occur.
  • Point and figure charts may be constructed using the daily closing price only, although a more accurate picture can be obtained using the highs and lows.
  • Because point and figure charts ignore the time factor, a non-volatile share (i.e. one with very little price fluctuation) will result in very little alteration of the chart, even over an extended period of time. The more volatile the share, the more useful the point and figure chart.
  • The time dimension is sometimes recorded by substituting the "X" or "O" symbol representing the first recorded price change in the particular month, with the first letter on the month in question, or the number of the month (1 - 12). The years are also sometimes recorded at the bottom of the page, under the column reflecting the first month.

Point and figure chart formations

A "formation" is a distinguishable pattern, which occurs regularly in a chart. There are various other types of formations such as:

  1. The Double Top Formation and Double Bottom Formation;
  2. Variations on the Double Top and Double Bottom Formation;
  3. The Bullish Signal Formation and Bearish Signal Formation;
  4. The Bullish and Bearish Symmetrical Triangle Formation;
  5. The Triple Top Formation and Triple Bottom Formation;
  6. Formations in Combinations;
  7. Variations on the Triple Top Formation and Variations on the Triple Bottom Formation;
  8. The Broadening Formation;
  9. Bullish and Bearish Catapult Formation; and
  10. The Bullish Signal Reversed Formation and Bearish Signal Reversed Formation.

The double top formation

This is the basic chart pattern in a bull market. The chart picture shows a first top at 29c. This is followed by a decline to 26c, which in turn is again followed by a rally to 29c. The two tops at 29c comprise the double top. A breakout above this double top to 30c registers a buy signal (indicated by the letter B).

P & F Charts - Double Top Formation

This basic formation consists of three vertical columns. It is impossible to have a chart pattern that consists of less than three columns. All other chart patterns are derivations from and combinations of this basic pattern. Since all other formations are derived from this basic formation they may contain the Double Top formation as part of their chart patterns. The trader will then have a choice to act on the original breakout or on those occurring later in more complex formations.

The double bottom formation

This is the basic chart pattern in a bear market. The chart picture shows a first bottom at 27c. This is followed by a rally to 30c, which in turn is again followed by a decline to 27c. The two bottoms at 27c comprise the double bottom. A breakout below this double bottom to 26c registers a sell signal (indicated by the letter S).

This basic formation consists of three vertical columns. It is impossible to have a chart pattern that consists of less than three columns. All other chart patterns are derivations from and combinations of this basic pattern. Since all other formations are derived from this basic formation they may contain the Double Bottom formation as part of their chart patterns. The trader will then have a choice to act on the original breakout or on those occurring later in more complex formations.

P & F Charts - Double Bottom Formation

Variations on the double top and double bottom formation

In example A below, the breakout at 29c takes place after two bottoms have been made at the same level instead of merely one bottom. The first bottom at 25c was re-tested and held. Then came the rally for the breakout on the Double Top formation.

This type of Double Top formation is more common than a straight up move from a single bottom. This pattern usually appears at market bottoms. With this formation, four vertical columns are required for their completion. This chart pattern may also appear as integral parts of more complex formations and the trader or investor has the choice of acting on these breakouts or on the breakouts that occur in the more complex formations.

In example B, the breakout at 28c takes place after two tops has been made at the same level instead of merely one top. The first top at 32c was re-tested and held. Then came the decline for the breakout on the Double Bottom formation. This type of Double Bottom formation is more common than a straight down move from a single top. This pattern usually appears at market tops. With this formation, four vertical columns are required for their completion. This chart pattern may also appear as integral parts of more complex formations and the trader or investor has the choice of acting on these breakouts or on the breakouts that occur in the more complex formations.

P & F Charts - Variations of the Double Top & Double Bottom Formation

The Bullish Signal Formation

This is one of two classic patterns used in timing a share purchase. The significant feature of this chart pattern is a higher bottom followed by a higher top. As long as a share continues to make higher bottoms and higher tops, it is considered bullish. The first time it makes a higher top after making a higher bottom is the signal that the share may be bought. It is telling us that Demand has overcome Supply and that the share, which up till now may have been bearish and in a downtrend, is now ready to make its upward move. Accumulation by those in the know has been completed.

In example A below, we have a bottom at 25c and then a higher bottom at 27c. It also has one top at 31c and then a higher top 32c. When the higher top is made at 32c, the share has made an upside breakout and has given a buy signal. The letter B indicates the buy signal.

In example B, we again have a bottom at 25c and then a higher bottom at 29c. We also see a first top at 32c and then a higher top at 33c. The higher top at 33c is the signal that the share may be bought. The buy signal takes place at a higher level than in example A, although both chart patterns start with a bottom at 25c. Four vertical columns are required for the Bullish Signal Formation.

P & F Charts - Bullish Signal Formation

The Bearish Signal Formation

This is one of two classic patterns used in timing a share sale. The significant feature of this chart pattern is a lower top followed by a lower bottom. As long as a share continues to make lower tops and lower bottoms, it is considered bearish. The first time it makes a lower bottom after making a lower top is the signal that the share may be sold. It is telling us that Supply has overcome Demand and that the share, which up till now may have been bullish and in an uptrend, is now ready to make it's a downward move. Distribution by those in the know has been completed.

In example A, we have a top at 33c and then a lower top at 31c. It also has one bottom at 28c and then a lower bottom 27c. When the lower bottom is made at 27c, the share has made a downside breakout and has given a sell signal. The letter S indicates the sell signal.

P & F Charts - Bearish Signal

In example B, we again have a top at 33c and then a lower top at 30c. We also see a first bottom at 27c and then a lower bottom at 26c. The lower bottom at 26c is the signal that the share may be sold. The sell signal takes place at a lower level than in example A, although both chart patterns started from the same high at 33c. Four vertical columns are required for the Bearish Signal Formation.

The Bullish and Bearish Symmetrical Triangle Formation

This type of formation is basically a mere variation on the Bullish Signal Formation. In example A, we should note firstly the standard Bullish Signal Formation of higher bottoms and lower tops. We see a bottom at 31c and then a higher bottom at 33c. We see a top at 36c and then a higher top at 37c. This higher top at 37c, indicated by the letter B, gives us the buy signal. The additional factor that makes a triangle out of this formation is the top at 38c and the lower top at 36c. When trend lines are drawn from the bottom at 30c and from the top at 38c, they form a symmetrical triangle.

In example B, we should first note the regular Bearish Signal Formation of lower tops and higher bottoms. We have a top at 38c then a lower top of 36c. We have a bottom at 33c then a lower bottom at 32c. The lower bottom at 32c gives us the sell signal and is indicated by the letter S. The feature that makes this formation a triangle is the bottom at 31c and the higher bottom at 33c. If trend lines are drawn from the bottom of 31c and the top of 38c, they form a symmetrical triangle.

P & F Charts - Symmetrical Triangle

These Symmetrical Triangle formations require a minimum of five vertical columns. Variations can be worked out where they have seven vertical columns, nine vertical columns, or even more. The Bullish Triangle Formation is profitable 71.4% of the time for an average gain of 30.9%. The average time for the gain is 5.4 months.

The Triple Top Formation

This is the second of the two classic chart patterns used in timing a share purchase. Unlike the Bullish Signal formation, it is only the action of the share at previous tops that is important, not the bottoms. No higher bottoms are necessary in this formation. All that is necessary is the penetration of two previous tops. The penetration of two previous tops by a third top compensates for the fact that the chart formation has no higher bottom. Because of the higher bottom in the Bullish Signal formation, the penetration of only one previous top was necessary. This formation must have a minimum of five vertical columns.

In example A, we see a base of accumulation between 5c and 20c. There are two level tops at 20c. The buy signal was given when these two tops had been penetrated. At this point Demand has overcome Supply and the extension of the up move is to be expected.


P & F Charts - Triple Top Formations

In example B, we have a base of accumulation between 5c and 25c. The first top is at 25c and the second top is at 20c. The buy signal was given at 30c when these two tops had been exceeded. This chart pattern contains a Double Top Formation, but many traders will wait for the Triple Top breakout before buying. In both examples we have no higher bottoms. Both of these formations have level bottoms at 5c. We compensate for the lack of a higher bottom by waiting for the penetration of the two previous tops.

The Triple Bottom Formation

This is the second of the two classic chart patterns used in timing a share sale. Unlike the Bearish Signal formation, it is only the action of the share at previous bottoms that is important, not the tops. No lower tops are necessary in this formation. All that is necessary is the penetration of two previous bottoms. The penetration of two previous bottoms by a third bottom compensates for the fact that the chart formation has no lower tops. Because of the lower top in the Bearish Signal formation, the penetration of only one previous bottom was necessary. This formation must have a minimum of five vertical columns.

In example A, we see a top distribution between 45c and 42c. There are two level tops at 45c. The sell signal was given at 41c when these two bottoms had been penetrated. At this point Supply has overcome Demand and an extension of the down move is to be expected.

P & F Charts - Triple Bottom Formations

In example B, we a have a top of distribution between 45c and 41c. The first bottom is at 41c and the second bottom is at 42c. The sell signal was given at 40c when these two bottoms had been exceeded. This chart pattern contains a Double Bottom Formation, but many traders will wait for the Triple Bottom breakout for a sell signal.

In both of the above examples, we do not have lower tops. Both formations have level tops at 45c. We compensate for the lack of a lower top by waiting for the penetration of two previous bottoms.

Formations in combinations

In example A below, we have an illustration of both the Bullish Signal Formation and the Triple Top Formation combined into one. It contains essential elements of both formations. It has both higher bottoms and higher tops plus the penetration of three tops.

In example A, the buy signal which takes place at 36c (indicated by the letter B) is both a buy signal on Bullish Signal Formation and a Triple Top Formation. This chart pattern occurs less frequently than either of the two separately, but when it does occur it is usually a very strong buy signal. This formation is profitable 79.5% of the time for an average gain of 36%. The average time for such gain is 8 months. A minimum of five vertical columns is necessary for its completion.

P & F Charts - Formations in Combinations

In example B, we have an illustration of both the Bearish Signal Formation and the Triple Bottom Formation combined into one. It contains essential elements of both formations. It has both lower tops and lower bottoms plus the penetration of three bottoms. The sell signal which takes place at 32c (indicated by the letter S) is both a sell signal on Bearish Signal Formation and a Triple Bottom Formation. This chart pattern occurs less frequently than either of the two separately, but when it does occur it is usually a very strong sell signal. A minimum of five vertical columns is necessary for its completion.

Variations on the Triple Top Formation

Example A below shows the upside penetration of not merely three tops but actually four tops. Sometimes you may find penetrations of five or more tops. From a timing point of view, this has no more significance than the penetration of merely three tops. The share cannot be bought until the penetration occurs and it occurs at the same point no matter how many previous tops are penetrated. The difference in the formation is important when trying to estimate the extent of the subsequent move. Later, we will deal with this more fully when we discuss "counts" or price projections to estimate the probable extent of the move. Since we have more vertical columns in this variation of the Triple Top formation, any horizontal count across the formation will necessarily show a greater potential up move.

P & F Charts - Variations on the Triple Top - Example A

Example B below shows a Triple Top formation with a long "tail" down. Note the down move in the fourth vertical column before the final up move in the fifth column to give the buy signal on the penetration of the Triple Top Formation. This formation also occurs frequently in chart patterns. It is an unusually strong formation. The reason for this is that what at first appears to be a heavy overhanging supply of shares (between 25c and 45c) was actually not so.

P & F Charts - Variations on the Triple Top Formation - Example B

There actually was no supply of shares to interrupt the upward move towards the breakout. The long "tail" down was not due to an overhead supply but, perhaps, to some news factor that was interpreted incorrectly (or sometimes even to some misleading news), or to some dramatic international or national event also incorrectly interpreted for the moment. The move up after such a happening is usually very dramatic and profitable.

Variations on the Triple Bottom Formation

Example A below shows the penetration of not merely three bottoms, but actually four bottoms. Sometimes you may find penetrations of five or more bottoms. From a timing point of view, this has no more significance than the penetration of merely three bottoms. The share cannot be sold until the penetration occurs and it occurs at the same point no matter how many previous bottoms are penetrated.

P & F Charts - Variations on the Triple Bottom Formation

Example B below shows a Triple Bottom formation with a long "tail" up. Note the up move in the fourth vertical column before the final down move in the fifth column to give the sell signal on the penetration of the Triple Bottom Formation. This formation also occurs frequently in chart patterns. It is an unusually strong formation. The reason for this is that what at first appears to be heavy demand for shares (between 38c and 41c) was actually not so.


P & F Charts - Variation on the Triple Bottom Formation - Example B

There actually was no demand for shares to interrupt the downward move towards the breakout. The long "tail" up was not due to demand but, perhaps, to some news factor that was interpreted incorrectly (or sometimes even to some misleading news), or to some dramatic international or national event also incorrectly interpreted for the moment. The move down after such a happening is usually very dramatic and unprofitable.

The Broadening Formation

These chart patterns are actually a Triple Top Formation in example A and a Triple Bottom Formation in example B.

P & F Charts - The Broadening Formation

In example A, we have the penetration of three tops with the buy signal at 50c. There a certain characteristics about this formation that singles it out for special attention. The breakthrough on the Triple Top takes place as follows:

  1. We have the first top at 40c.
  2. Then we have the first bottom at 25c.
  3. The second top takes place at 45c, at a higher level than the first top.
  4. The second bottom takes place at 20c, at a lower level than the first bottom.
  5. And finally we have the breakout at a higher top at 50c.

We have a broadening price pattern - a top followed by a bottom, then a higher top and a lower bottom, and finally the upside breakout on a still higher top. These five points must be kept in mind in distinguishing this Triple Top formation from the usual Triple Top formation. This type of Triple Top formation occurs most frequently not at the bottom of an up move, but during an up move which already may have gone a long way. This type of formation is usually classified as a "blow-off" formation by bar chartists and, therefore, bearish. In Point and Figure charting, however, it has always proved to be very bullish as the so-called "blow-off" usually occurs at a much, much higher level and thus allows for a handsome profit. This variation of the Triple Top formation does not occur too frequently. It should be watched for very carefully and taken advantage of when it does occur. This broadening bullish pattern and the Triple Top with the long "tail" down can be classified as the best of the Triple Top formations. Example B is the same broadening type of formation with the breakout on the downside. It goes from a bottom at 40c to 75c, then a lower bottom at 30c and a higher top at 55c. It finally breaks-down on the third lower bottom at 20c. This bearish formation occurs so infrequently that it is not worthwhile looking for. In a bear market, the ordinary Triple Bottom formation serves the purpose very well. Here, too, the best of the Triple Bottom formations, are the ones with the long "tail" up.

Bullish and Bearish Catapult Formation

The Bullish Catapult Formation (example A) starts with the classical Triple Top Formation. Note the original buy signal at 34c on a Triple Top formation. Instead of proceeding straight upwards, it only rallied to 35c and then pulled back three points. The share then proceeded to rally once more and exceeded its previous high at 36c. When it does this, it registers a new buy signal at 36c (indicated by the letter B).

P & F Charts - Bullish Catapult Formation

Example B is an illustration of the Bearish Catapult Formation, which starts with the classical Triple Bottom Formation. Note the original sell signal at 34c on a Triple Bottom formation. Instead of proceeding straight downwards, it only declines to 33c and then pulled back three points. The share then proceeded to decline once more and penetrated its previous bottom at 33c. When it does this, it registers a new sell signal at 32c (indicated by the letter S).


P & F Charts - Bearish Catapult Formation

To qualify as a Bullish or Bearish Catapult formation the move from the original breakout, whether up or down, cannot exceed seven points. Neither can the pullback from the original breakout decline below a previous bottom in the Bullish Catapult formation or exceed a previous top in the Bearish Catapult formation. If either of these two happen then there is no possibility of this type of formation. These formations occur about 50% of the time after an original Triple Top or Triple Bottom formation. It is often worthwhile to wait for such a chart pattern to save time that may elapse in waiting out a pullback. It is sometimes better to sacrifice a number of points for the sake of better timing and less risk.

The Bullish Signal Reversed Formation

This pattern starts with a perfect Bearish Signal Formation. However, instead of consisting of merely four vertical columns, it contains seven vertical columns. The first six columns gave us the classic pattern of lower tops and lower bottoms. The seventh column, however, shows a price reversal by a steady influx of demand without forming any sort of a base of accumulation. Because of this unexpected reversal, the buy signal takes place at 42c, the first time the price penetrated a previous top. The momentum of this straight upward reversal in the seventh column usually carries far enough in the same direction to yield a substantial profit. This formation usually proves most profitable. It does not occur too often, but it should be taken advantage of when it does happen.

P & F Charts - Bullish Signal Reversed Formation

The Bearish Signal Reversed Formation

This pattern starts with a perfect Bullish Signal Formation. However, instead of consisting of merely four vertical columns, it contains seven vertical columns. The first six columns gave us the classic pattern of higher bottoms and higher tops. The seventh column, however, shows a price reversal by a steady influx of supply without first forming a top of distribution. Because of this unexpected reversal, the sell signal takes place at 39c, the first time the price penetrated a previous bottom.

P & F Charts - Bearish Signal Reversed Formation

In the previous examples, we have dealt with the most common trading formations that occur both in bull and bear markets. We have by no means exhausted all their possible combinations and permutations. Recognising trading formations is just a matter of study and practice. The more you study point and figure charts, the more formations you will discover. Some formations may prove to be more profitable than others. You will probably find some new chart patterns on your own. If you chart enough shares, you may be able to limit your own trading to one or two formations that you think best.

A word of warning - chart patterns are not always in themselves guarantees of successful trades. You will have "false" breakouts. A breakout from a base of accumulation does not automatically guarantee a profit on the long side of the market. There are other technical factors that have to be taken into consideration. In the next section we will deal with one of these factors, namely, trend lines. The importance of trend lines cannot be over emphasised. It is one of the most important tools that can be used in recognising and avoiding "false" breakouts.

Trend lines

The chart patterns discussed in the previous section are but th

e first step in deciding whether a share should be bought or sold. The next step is to determine whether or not the signals they are giving are in agreement with the basic trend in the share. This is where trend lines assume their importance.

The two most important trend lines to watch are:

  • The basic Bullish Support Line, and
  • The basic Bearish Resistance Line.

The Bullish Support Line

The chart shows a low of 31c with the first buy signal at 40c on a Double Top Formation and its second at 45c on a Bullish Signal Formation. A Bullish Support Line may now be drawn. It is indicated by the broken line on the chart. It is drawn from the square below the low and is extended as far to the right as the chart will allow. This trend line does not connect points. It is a line drawn from the lowest point made after the completion of a bear market or a significant down move. It intersects successive ascending corners of the squares on the chart. It is a predictive line because it can be drawn immediately when an uptrend begins and one does not have to wait to connect bottoms. This line rarely has to be changed.

A trend line connecting points has to be constantly revised as its points' changes. There is no rationale either behind a trend line connecting points or one drawn connecting corners. Both are different methods of drawing a straight line. In a 3-box reversal chart, this type of line gives better results than a line connecting points. As long as the chart pattern remains above this line, the share is considered long term bullish. Once this line is finally penetrated on the downside, all bullish positions in the share should be cancelled. A long-term trader can stay with the share as long as the Bullish Support Line is not violated. Any sell signals given above this line are apt to prove false, especially if given close to the line.

Two important factors to remember:

  • Do not take a sell signal close to the Bullish Support Line and,
  • The touching of the Bullish Support Line can, if one so desires, be used as an additional buy point. If one uses such action as an indication of an additional buy point, then one should place a stop loss order immediately beneath the trend line.

P & F Charts - Bullish Support Line

The Bullish Resistance Line

The chart illustrates two bullish lines - a Bullish Support Line with which we are already familiar with and a Bullish Resistance Line. The lower line is the Bullish Support Line and the upper line is the Bullish Resistance Line. This trend line is drawn in the same manner as the Bullish Support Line:

  • It is a bullish line because the trend is upward,
  • It is a resistance line because there is a tendency on the part of the price pattern to stop or meet resistance at this line.

The trend line is drawn after a break out from a bullish chart pattern. In the chart opposite, there was a breakout on a Triple Top Formation at 38c indicated by the letter B. When this happened, the Bullish Resistance Line was drawn. It was drawn from the top from the extreme left of the formation where it runs into a sort of wall of O's. It is always drawn from the top of the highest X next to the wall. If you study the chart, you will notice that three up moves stopped near or at this Bullish Resistance Line. This does not mean that the long-term trader need step out of his position every time this line is approached. He should hold his position as long as the Bullish Support Line remains intact.

P & F Charts - Bullish Resistance Line

The Bearish Resistance Line

The chart gave a sell signal at 64c on a Double Bottom Formation and a second signal at 61c on a Bearish Signal Formation. The Bearish Resistance Line is drawn from the high at 70c. It is a line intersecting the corner of each successive lower square as you move to the right. It is important to point out that this trend line was not penetrated during the entire rise of the market (the middle part of the chart). At no time should this share have been bought. This illustrates the value of the trend line – whether up or down. You were alerted to the fact that buy formations below the Bearish Resistance Line would probably prove false and should not be acted upon. This was a share to avoid. If you wanted to buy a share, then you should have bought one that had penetrated its Bearish Resistance Line.

P & F Charts - Bearish Resistance Line

The Bearish Support Line

In the chart on the opposite page, we have two bearish or downward trend lines. The top line is the Bearish Resistance Line and the bottom line is the Bearish Support Line. The Bearish Support Line is the converse of the Bullish Resistance Line. With the Bullish Resistance Line it gave us an indication as to where the upward move might encounter temporary resistance,

With the Bearish Support Line it gave us an indication as to where the downward move might meet with temporary support. The Bearish Support Line is drawn after a sell signal is given on a Bearish Signal Formation. It is drawn from the extreme left of the formation where it encounters a "wall" of X's. Since a down move is usually sharper and of shorter duration than an up move, the move does not usually stop exactly at the line but may penetrate it by a point or more. This happened at least twice in the chart. However, this support line still serves as a guide that can be used to determine where buying support might come in to temporary halt the down move.


P & F Charts - Bearish Support Line

Determination of share price objectives

Once a buy signal has been given on a point and figure chart, assuming one has acted on the signal and bought the share, the next logical question is how far the up-move can be expected to progress. Two methods are commonly used to estimate this target:

The horizontal count

This method works best where the upside breakout (multiple top breakout) has been preceded by a long period of accumulation of shares, in which supply and demand have been battling one another. This gives rise to a horizontal base consisting of number of vertical columns of X's and O's. In general, the greater the number of columns in this base, the higher the share can be expected to rise after the breakout. We then calculate the upside target as follows:

  1. Multiply the number of columns in the horizontal base by 3 (for a 3-point reversal).
  2. Multiply the resultant product by the amount represented by each block or box size on the chart;
  3. Add the resultant product to the lowest reading in the horizontal block
  4. The resultant sum will give you your upside target.

Example: The upside target in the chart below = (14 x 5 x 3) + 0 = 210c.

P & F Charts - Horizontal Count

A similar calculation may be done to determine the downside target with a sell-signal (multiple bottoms) from an area of distribution, but in this case one subtracts the product from the highest price in the horizontal formation [i.e. highest price in horizontal formation - (number of columns in horizontal base x 3 x value of each block).

Example: The downside target in the chart below = 100 - (6 x 5 x 3) = 10c

P & F Charts - Horizontal Count – Bearish

The vertical count

A vertical count is based on the general principle that the higher the first vertical row of X's in an upside breakout, the higher the ultimate target. We then calculate the upside target as follows:

  1. Multiply the number of blocks in the vertical column of X's by the amount represented by each block.
  2. Multiply the resultant product by 3 (for a 3-point reversal).
  3. Add the resultant product to the lowest reading in the vertical column.
  4. The resultant sum will give you your upside target.

Example: The upside target in the chart below = (13 x 5 x 3) + 15 = 210c.

P & F Charts - Vertical Count

A vertical count may also be used to estimate the downside target as follows:

  1. Multiply the number of blocks in the vertical column of O's by the amount represented by each block.
  2. Multiply the resultant product by 3 (for a 3-point reversal).
  3. Subtract this product from the highest recorded price in the column of X's directly preceding the column of O's measured.
  4. The result sum will give you your downside target.

Example: The downside target in the chart below = 170 – (11 x 5 x 3) = 5c.

P & F Charts - Vertical Count – Bearish

Several important points need to be made in respect of the above calculations, both horizontal and vertical:

  1. Upside target calculations are more dependable when the general trend of the market is up. Similarly, downside calculations are more accurate when the general trend of the market is down.
  2. If both a vertical and a horizontal count can be done, and if both project a similar target, the latter is clearly more dependable.
  3. Investment decisions based purely on point and figure calculations are risky. The calculated target must be considered along with other technical and fundamental information.
  4. There is no time limit for the target to be attained.

Conclusion

Although Point and Figure (P&F) charts are an interesting method of tracking share price movements, some new technical analysts still do not use them as much as they should, mainly because of a lack of knowledge or ignorance. However, P& F charts have many advantages like smoothing out minor fluctuations in the share price. The chartist will then look for certain chart formations for buy and sell signals. Secondly, the so-called consolidation areas are unique to point and figure charts. The horizontal counts will by then applied to these consolidation areas to predict how far the price is likely to move when it exits from such a consolidation block.

Imagine being in a position where you have completed your fundamental analysis on the share and everything looks great. Various technical indicators have also confirmed and given you further buy signals. Now finally, by using point and figure charts, your price projection on the horizontal count suggests that the share price has a good chance of rising by at least 50% and the probabilities that that happening is about 80%. Would you invest in the share? In other words, you could use the point and figure chart as a method to measure the reward and risk ratio.

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