Have you been wondering how to read point figure stock charts? Or have you dismissed them as an old-school traders’ technique that belongs to the past?
Whatever your impressions may be, point figure charts have been used by traders and investors for more than a hundred years. They are a powerful way to reduce the noise we see in other kinds of stock charts like candlestick, or open-high-low-close, or even line charts and reveal meaningful trends that are otherwise hard to see.
How Point Figure charts work
Point and figure charts are less intuitive than simple line charts or candlestick charts. Point and figure charts provide a different way of looking at price movement. What you see in a point and figure chart depends very much on how you set it up. In fact, any single sequence of data points can be displayed as a point and figure chart.
Point and figure charts plot price movement as rising columns of Xs when the price is trending up and descending columns of Os when the price is descending. They are plotted on a chart that is divided into columns and rows of squares, just like the pages of math exercise books we had at school. The greater the movement is from the starting point, the more Xs are plotted in the rising column when the price is increasing and the more Os are plotted when the price is decreasing.
Time may be displayed by flags or numbers on a point and figure chart, but time is not plotted as a constant. When there is a significant enough switch from ascending to descending price or vice versa, the chart moves to the right and starts recording a new column of either Xs or Os whichever it wasn’t doing before.
Point figure chart setup
When creating point and figure charts there are two parameters that need to be set.
The first parameter is how much of the quantity we are measuring is represented by each vertical box. This could be a constant dollar value of a stock or other financial instrument. Or it could be a percentage change in price from a starting point. It could also be the percentage of stocks in an index that are showing specific characteristics at that time.
The second parameter to be established is how large a trend reversal has to be in order to move to the right and start a new column. The setting most people use for this is three boxes.
The idea of point and figure charts is to reduce the level of noise inherent in price movement and instead to track significant trends in price. So the decision on how much price movement results in a column change is key.
It should come as no surprise that it’s fairly easy to create point and figure charts by hand. After all, they have been around for more than a hundred years and the widespread use of computers is comparatively recent over that timeframe.
Point figure chart example
So let’s look at some stock price data. Here we have a line chart and a candlestick chart of the Exchange-Traded Fund or ETF with the symbol SPY, that tracks the Standard and Poor’s 500 Index, for the period from 6 January to 10 August 2020.
1)Data source: Yahoo Finance, chart by Bad Investment Advice.
For many of us, this was a fairly familiar period in the stock market. The Standard and Poor’s 500 Index tanked in late February and early March 2020 along with most other major indexes when the markets woke up to the realities of the Coronavirus.
But what then followed was almost as surprising. The market quickly recovered creating the V-shape that we see in both the line and the candlestick charts.
The line chart tells the simple story of this price movement. The candlestick chart gives us a better sense of when the price action was more volatile where we see the larger candles. But the candlestick chart still presents a similar visual shape to the line chart.
If we look at the main points in the chart this is what we see.
From the weekly data, the week of 6 January the price opened at $320, and through to the week of 17 February, the price climbed to reach a high of $339 closing the week at $324.
From there the price dropped precipitously to reach a low of $218 in the week of 23 March.
Then the price rose to retrace its losses with a bit of a dip in June but by the week of 10 August, it closed at $330 higher than the highest weekly close in February.
And now on a point figure chart
Now here’s what that price data looks like as a point and figure chart. Here we are using $5 for the box size and using three boxes to cause a column flip.
2)Data source: Yahoo Finance, chart by Bad Investment Advice.
Let’s note that here we are using weekly closing prices. In fact, if we had used daily closing prices the point and figure chart created would have been similar or possibly identical. Only if there had been daily price movements within a single week large enough to flip a column could we have seen a change.
So the question becomes, how is the price movement represented on the point and figure chart? Let’s look in detail at how each of the columns is traced.
3)Data source: Yahoo Finance, chart by Bad Investment Advice.
We start reading the chart on the left-hand side. The price started at $313 and rose to $328. The standard we are using here is to round the price down to the nearest box value. So our first column is of rising Xs starting in the $310 box and climbing to the $325 box drawn by figure A and the little up arrow.
Then in mid-February, the price dropped more than $15 so we flip to a new column of Os at point B and draw the first three O boxes. From here the price dropped pretty much straight down to $222. Or to be more precise, the price dropped with no reversal large enough to cause a column flip. Remember we are using $5 per box and three boxes to cause a column flip, so only a reversal of $15 or more would cause a new column to be created. So we fill down all the way from the $325 box to the $225 box with Os following the down arrow C.
Now we have reached the third week of March. The price turns around from its low and increases by more than $15 so we flip to a rising column of Xs at arrow D and the first three boxes of Xs are drawn. The total rise here, shown by arrow E reaches $312 so the $310 box is filled. It is now June and the price rise stalls and drops to $294. So at arrow F we flip to a column of Os and fill the boxes down to the $295 box.
Now the price trends in the positive direction again and at arrow H we flip again to a column of Xs. The price goes straight up to just over $330 rise at arrow I, we fill Xs up to the $330 box.
As we can see the point and figure chart is a much simpler way of showing the substantial sell-off followed immediately by a climb back to just shy of the previous high by about $15. Then there was a brief pull-back followed by a climb back this time to exceed the previous high.
Bull and bear trends, support and resistance
Let’s take a look at another chart that gives us some examples of bull trends, bear trends, price support, and price resistance. Here is a candlestick chart for Vodaphone, symbol VOD, from January 2019 to November 2021.
4)Data source: Yahoo Finance, chart by Bad Investment Advice.
There is a lot of data here and in order to be able to see what happened over the period, we have to use weekly price candles otherwise the chart is just too busy. We can quite readily see periods of downward trending price, periods of upward trending price, and some sideways moving price between support and resistance.
So what does this look like on a point and figure chart?
Well, in order to give a meaningful vertical scale, here is what a point and figure chart for Vodaphone looks like using $0.25 as the box size and three boxes to flip the column.
5)Data source: Yahoo Finance, chart by Bad Investment Advice.
Like the candlestick chart, there is a lot going on here. But first, let’s look at some features that you will commonly see on point figure charts. Here are some closeups to highlight specific features.
6)Data source: Yahoo Finance, chart by Bad Investment Advice.
As we can see, down the least hand side the value of each box is listed. In this chart, the actual stock price was rounded down to the nearest box value which is in multiples of $0.25.
7)Data source: Yahoo Finance, chart by Bad Investment Advice.
We mentioned before that dates are often shown as numbers inserted into the X or O columns on the point and figure chart. Here we see the months 1 corresponds to January, 2 to February, etc.
As we said, it is price change that determines how many boxes will be filled on each column and when columns flip between Xs and Os and not the date. So at times when the price moves dramatically, you see the numbers indicating the months are more widely spread apart
For example, we can see that between January and February 2019 which was a comparatively calm period for the stock price the chart only made five box changes. But between March and April 2020 when much of the COVID crash happened, the chart makes a total of sixty box changes.
Support and resistance
Something that is quite easy to see on the point and figure chart is areas of price support and price resistance. Let’s take a closer look at the period between 1 May and 31 July 2019 on the point figure chart.
8)Data source: Yahoo Finance, chart by Bad Investment Advice.
Here we see a line of resistance set up when the price tested $17 on an uptrend on 4 June and on 5 July. But this resistance didn’t hold on 26 July when the price broke through.
We also see a level of price support at $15.50 that was held on three occasions 23 May, 25 June, and 17 July.
Here is that same period on a candlestick chart.
9)Data source: Yahoo Finance, chart by Bad Investment Advice.
We see the same support and resistance on the candlestick chart.
Bull and bear trending price
Bull trending price shows up when the price makes higher highs and higher lows. Bear trending price is when the price is making lower highs and lower lows.
On this chart, we can see some brief periods of bull trends and bear trends. Maybe this isn’t the ideal example of stock price movement to show bull trends and bear trends but there are a few periods where trends almost form.
If we look first at the point and figure chart we can see the bull trend from late March 2020 to early June 2020. Then Vodaphone when into a bear trend that lasted until mid-November.
10)Data source: Yahoo Finance, chart by Bad Investment Advice.
Now let’s check the same period on the candlestick chart for Vodaphone.
11)Data source: Yahoo Finance, chart by Bad Investment Advice.
Point figure buy and sell signals
Among the classic features used by traders and investors reading point and figure charts are buy signals and sell signals. A stock is said to move to a buy-signal when it is in a column of rising Xs and it surpasses by one box the highest box of the previous column of Xs. This is called a point and figure buy signal.
The reverse is the case for point and figure sell signals. A stock is said to move to a sell signal when it is in a falling column of Os and the column drops one box lower than the previous column of Os.
A stock is always either on a buy signal or a sell signal. There is no in-between state.
This is what they look like on a chart.
12)Chart source: Bad Investment Advice.
In this case, the chart starts with the stock on a sell signal. Let’s assume that we just happen to know that. And even though from the first column of falling Os it moves to rising Xs we also happen to know that this column of Xs doesn’t surpass the previous column of Xs. So the stock stays on a sell signal all the way until in the fourth column when the rising column of Xs makes one box past the top of the previous column the stock then switches for the first time that we see here to a buy signal.
That column carries on rising another 12 boxes and then reverses to a falling column of Os. It falls a total of 10 boxes and no further but that column of Os has still not yet surpassed the bottom of the previous column. So all this time the stock stays on a buy signal. Only two columns later does it add a box of Os below the bottom of the previous column of Os and then it switches to a sell signal.
We can see that the signal switches again a few times. In one instance there are as many as nine column changes before the stock moves from a buy signal at point E to a sell signal at point F.
One of the big advantages of point and figure buy and sell signals is that there is no subjectivity or judgment needed about whether a stock is on a buy signal or a sell signal. Since point figure charts are created mathematically, buy and sell signals are generated mathematically.
The bullish percent index
One particularly popular use of point and figure charts is to display bullish percent indexes. All the charts we have looked at here are plotting a sequence of dollar values of a stock. But we noted earlier on that point and figure charts can be used to plot any sequence of variables.
Point and figure charts work especially well to plot the percentage of stocks that are components of an index that are on point figure buy signals.
In effect, a bullish percent index on a point and figure chart is a point and figure chart created by examining the point and figure charts of all the individual stocks and recording the percentage of stocks that are on buy signals.
Of course, we could choose to display a bullish percent index as a line chart and not as a point and figure chart – but where would be the fun in that?
Bullish percent indexes are measures of market breadth.
Something we have seen very acutely since at least August until mid-October 2021, most of the market indexes of the US markets have been gunning higher while the actual number of stocks comprising those indexes that were on buy signals were falling.
We can create bullish percent indexes for all varieties of indexes. For US markets these can be the Standard and Poor’s 500, the NASDAQ, the Russel 2000 but the big daddy of them all is the New York Stock Exchange, or NYSE bullish percent index.
What makes the NYSE bullish percent index so interesting to watch is that significant moves in this breadth indicator tend to foretell similar significant moves in the main market indexes.
In other words, if you are fully invested in the market and the market indexes are moving higher, it is a good idea to keep an eye on the bullish percent index for that market. If the bullish percent index is on a buy signal then you can expect that the market will continue to move higher. But if the bullish percent index turns down and moves to a sell signal, that would be a good time to tighten your stop-loss orders, raise more cash and even consider some insurance by buying put options.
Here is what the NYSE bullish percent index from 5 November 2021 looks like on a point and figure chart.
Head and shoulders on point figure charts
Just like lines of price resistance, price support, bull trends, and bear trends, other familiar price formations are visible on point figure charts. The head and shoulders formation is a classic formation indicative of a reversal from a bull trend to a bear trend. This is the basic shape and characteristics of a head and shoulders pattern.
The pattern is strongest when the right shoulder is lower than the left shoulder and the price low on the right side of the head is lower than on the left side as is shown above. Both of these characteristics indicate that selling pressure is increasing. The pattern looks very similar on a point and figure chart.
How the neckline shows up on the point and figure chart will depend on the box size settings. In this case, the line shows up as being level but it is possible it could slope down and the formation would be stronger if it did.
As is the case on a candlestick or line chart we read the price target as the distances of a vertical drop between the head and the neckline and then we project that objective the same distance below where the price breaks down through the neckline.
Here we should remember that we set up the actual prices to be at the bottom of each box. So we have to be consistent always taking a price reading from box-bottom to box-bottom.
Inverted head and shoulders on a point figure chart
As a reminder, here is a simplified line representation of a standard inverted head and shoulders formation.
Now let’s see what that looks like on a point and figure chart.
Again how the details show up on a point and figure chart will depend on how it is set up and particularly on the box size used. But here we see some classic features of an inverted head and shoulders formation.
The left shoulder doesn’t meet the bottom of the bear trend line. So buying pressure is increasing, or selling pressure is weakening. The head forms even further from the bear trend line showing that buyers continue to gain traction.
In this chart the neckline is horizontal and the price objective is measured as the vertical distance from the head to the neckline. Again remember on this chart the actual price is measured from the bottom of each box.
The right shoulder forms higher even than the left shoulder which is a very bullish indicator.
Other trend continuation and trend reversal formations on point figure charts
All the other usual price continuation formations can be seen on point and figure charts. And if you get into this way of looking at price action and the more you use them you will see double tops, double bottoms, flags, pennants, and triangles and they will all look very familiar.
From my own experience, after years of going cross-eyed looking at noisy line charts and candlestick charts and trying to discern the actual price trend, it is maybe easy to see why experienced traders and investors often use point and figure charts.
Questions and answers
Q. Does point and figure charting work?
A. Point and figure charts ignore the time element of price changes and instead focus on the size and direction of price changes. Point and figure charts are generally best used for looking at long-term trends. They are also good for understanding market breadth, in particular the number of stocks in an index that are on point and figure buy signals.
Q. What is a point on a point and figure chart?
A. A point on a point figure chart is the size of a box. It is usually a measure of price and it is a variable we choose when we set up the chart. For example, we could choose to use a point value of $1, then each box on the chart would represent a change of $1 in the value of the stock.
Q. What is a buy signal on a point and figure stock chart?
A. A buy signal on a point and figure chart is when the chart was previously on a sell signal and a new column of Xs adds one box higher than the highest box on the previous column of rising Xs.
A sell signal on a point and figure chart is when the chart was previously on a buy signal and a new column of Os adds one box lower than the lowest box on the previous column of falling Os.
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Affiliate Disclosure: This article contains affiliate links. If you click on a link and buy something, I may receive a commission. You will pay no more so please go ahead and feel free to make a purchase. Thank you