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Forex Analysis |
Daily Technical Analysis
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Point and Figure Charts | P&F Charts- ForexAbode Forex School
Last Updated (Friday, 23 December 2011 00:35) GMT
Point and Figure Charts (P&F charts):
In today’s world all required information is available on finger tips. Be this about the fundamental factors which affect the financial market or actual data about the changing prices at any moment of time. Similarly, unlike old days, we have access to various technical analysis tools which can do the analysis at the click of the button. Information is not a problem in this information age. What is important is how do we organize the information and process it.
On any trading day the prices do change every moment. Every movement is not important as it does not tell us about the market direction or the supply and demand situation. There are a lot of movements which can be ignored as they are just market noises.
Point and figure charts) can be a beautiful way to give us the true picture of the market moves, avoiding the market noises.
Point and Figure charting (P&F charts) and other charting methods:
While other charts e.g. bar charts, candle stick charts record every move of the market on a time scale, the soul of the Point and Figure chart is pure price action and nothing else. Point & Figure charting does not take the time factor, volumes, highs and lows etc into consideration. Its pure price action and that too avoiding market noises.
We develop these chart by eliminating any insignificant market movements. It takes into account pre decided amount of market moves which we consider significant.
Construction of Point and Figure charts:
First of all we decide about the following components:
1) Box Size:
This is the price movement in any particular market direction which is worth noting. it may be safe to consider 10 pips movement as box size. Any movement below box size is considered as noise and is ignored.
In this article we shall consider a box size of 10 Pips.
2) Reversal size:
If the market is moving in one direction, say upwards then how much should it go downwards when we decide that it’s a reversal? The most commonly reversal size is 3 boxes. That means if the box size is 10 pips then we shall only consider 30 pips movement in the opposite direction to decide that it’s a reversal.
In this article we shall consider reversal size as 30 pips (3 boxes)
Point & Figure charts are alternate columns of X’s and O’s. “X” represents price going up and “O” represents a movement downwards. Any one column on the chart will have either only X’s or O’s i.e. no single column can have both of X’s and O’s.
Before we talk further about the construction of Point & Figure chart, let’s look how the chart looks like:
Point and Figure Charts -Example 1:
Construction:
Please consider the chart in Example 1 above:
The first column in Point and Figure charting is of prices. Please note that the prices mentioned are with the box size of 10 pips i.e. 125.00 then 124.90 then 124.80 and so on. Any movement less than 10 pips is not be recorded.
The second column has all X’s. i.e. the time when the market moved up from 124.50. 126.50 is the level when we started constructing the chart. The first X appeared when the price moved to 126.60. Our first X appeared during the first trading period.
Now if the movement during any period of time (let’s consider a trading day) is less than 10 pips then we shall leave the chart untouched and no entries would be made. If the market moves upwards by 10 pips or more but less than 20 pips then we shall enter one “X” at 124.70. If the move is more than 20 pips but less tan 30 pips then two X’s will be entered at 124.70 and 126.80. Let’s say during the second trading period the chart the price moved up to 125 and hence we got three more X’s, at 124.70, 124.80 and 124.90.
Now let’s say during the next trading period the prices fell down by 10 pips. Our reversal size is 30 pips and hence no entry will be made in the chart. Lets say during the next session the market fell down to 124.55 which is 35 pips less than 124.90. That means that the price drop is more than the reversal size of 30 pips. We shall move to the next column and would enter three O’s. The O’s would be entered in the boxes of 124.80, 124.70 and 124.60. If the fall would have been more than 40 pips but less than 50 pips then four O’s would have been entered. The lowest would have been at 124.50.
The next column (the third column, not including the price column) is again of X’s. That means during this period market moved in opposite direction i.e. upwards by more than 30 pips. If the reversal would have been less than 30 pips, no entry would have been made. Similarly if the drop in the price would have been less than 10 pips no entry would have been made.
How to read Point and Figure charts:
Reading and analyzing Point and Figure charts and drawing trading conclusions is same as any other chart. We use the trend lines and the most common chart patterns for our trading decisions. Please have a look at the article about "Winning Chart Patterns" on either "Winning Strategies" page or "Technical Analysis" page
Please have a look on the following figures which are self explanatory:
Point and Figure Charts - Example 2:
In the above chart (Example 2) the the resistance level was broken and an upward move took place.
Point and Figure Charts - Example 3:
(Breakout from support level)
Example 3 shows the price broke out the support level and then continued downwards.
Example 4:
In the Example 4 the currency pair broke out the resistance level of triple top chart formation and then continued moving upwards.
Example 5:
In the chart in Example 5 the support level of triple bottom chart pattern was broken and then continued downward movement took place.
Example 6:
In the above chart (Example 6) the the trend line was sloping down and was indicating a bearish sentiment. But then the price broke out the resistance level of the trend line formation and then continued moving upwards.
Example 7:
In the above chart the trend line was sloping upwards and was indicating a bullish sentiment. But then the price broke out the support level of the trend line and then continued moving downwards.
Point and Figure Charts - Example 8:
In above chart the trend lines were forming a symmetrical triangle but then the price break out of the upper trend line and continued moving upwards.
Point and Figure Charts - Example 9:
In the chart above the trend lines were forming a symmetrical triangle but then the price break out of the lower trend line and continued moving upwards.
You may also check Important Chart patterns and candle stick charts
Wish you a successful trading with Point and Figure charting. |
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