Point and Figure charts!

Understanding and Using

P i t and Point d Figure Fi Charts VTAD March 8th, 2009 Jeremy du Plessis CMT, FSTA H d off Technical Head T h i l Analysis, A l i Updata U d t plc l

[email protected]

What is a Point and Figure Chart • Chart constructed with Xs and Os (not always) – Xs represent up movements – Os represent down movements

• • • • • •

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Xs & Os X O are called ll d ‘b ‘boxes’’ Each X & O represents a price interval called the ‘box size’ P i changes Price h b below l th the b box size i are iignored d Price is scaled on the vertical YY-axis N time No i scale l along l the h h horizontal i lX X--axis i Time not part of construction or analysis

Point and Figure Chart

Not ‘invented’ by anyone Started off as a price recording mechanism and db became a charting h ti method th d

How?

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Wrote down Prices th 19

Century Floor traders wrote prices down as stock traded (including fractions)

8 9½ 11¼ 12 12½ 13¾ 15 15½ 16 16½ 15 13¾ 12 11¼ 14¾ 15¼ 16 17½ 19¾ 20 21¼ 19½ 18¾ 19

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Removed Fractions But realised that fractions didn’t didn t add any y information. So they removed the fractions 8 9 11 12 12 13 15 15 16 16 15 13 12 10 10 11 11 14 15 16 17 19 20 21 19 18 19 20 20 21

First tenet of Point and Figure established 6

Difficult to make any sense

After a Busy Trading Day 8 9 11 12 12 13 15 15 16 16 15 13 12 10 10 11 11 14 15 16 17 19 20 21 19 18 19 20 20 21 23 21 22 23 22 20 19 18 1718 19 19 18 19 19 20 21 22 23 21 22 20 21 19 18 17 16 1817 16 18 19 19 18 17 18 19 19 20 21 21 22 22 21 21 22 23 18 19 19 18 19 19 20 21 22 23 21 22 20 21 19 18 17 16 18 18 19 19 18 19 19 20 21

Difficult to make any sense 7

Columns better Realised columns would be easier and more informative 15 14 13 12 11 10 9 8

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Noticed Patterns Started to notice patterns in the data

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Figure Chart Price record becomes a Figure g Chart

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15 14 13 12 11 10

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Point Chart Figure chart becomes a Point Chart 20

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X 5 X X X X 0 X X

5 X X X X 0

X X X X 0 0 0 X X X X X X X 5 X X X X

Point Charts and Figure Charts Traders referred to their point charts and their figure p g charts as their…. th i

Point and Figure charts! And so Point and Figure was born 12

As we know them today Modern Point and Figure chart 20

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X X X X X X X X X

O O O O O O

X X X X X O X X O X X O X X X X X X X

Construction 1. Reversal Size Parameter •

The number of boxes which require a column change – 1-box reversal – original method – 3-box reversal – most popular & objective – Other reversals

2. Box Size Parameter • • •

The p price interval represented p by y each X & O Price changes below the box size are ignored Changes chart sensitivity and time horizon

3 Construction Method and Data required 3. • • •

Tick – plot every price – original method Daily - using Close or High or Low. Never high and low Intraday Interval – using 60min, 1min close or high or low

4. Chart Naming • 14

Box size x Reversal for example 10 x 3

1-Box vs 3 3--Box Reversal Charts • Actually two different types of chart – Not mutually exclusive – Should be used together

• 3-box charts are more objective – Objective patterns – Objective trends – Objective targets

• 1-Box charts are more subjective – More difficult to interpret – 1-box chart ‘looks inside’ the 33-box chart

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Patterns & Signals • 3-box – Patterns & Signals are clear and unambiguous – Many patterns have been defined – Allows objective analysis

• 1-box – Patterns not as clearly defined – Two types of pattern but many variations – Analysis is subjective

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3-Box Patterns and Signals All 33-box P&F signals g based on Double--top and doubleDouble double-bottom break C b Can be C Continuous ti or R Reversall X X X X O X X O X X O X

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B Buy

O O X O O X O O X O O O O

Sell

1-Box Equivalent Continuation – called SemiSemi-Catapult p

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1-Box Equivalent Reversal – called Fulcrum

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3-Box Patterns more defined The wider the p pattern the stronger g it is Triple--top and tripleTriple triple-bottom break X X X X X X

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X X O X O X O X O X O X O O

Buy

O O X X O X O X O O X O X O O O O O

Sell

Common 3 3--Box Patterns Catapult p

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Common 3 3--Box Patterns Bearish and Bullish Patterns Reversed

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Common 3 3--Box Patterns Poles

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Common 3 3--Box Patterns Triangles g

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P&F Signals & Patterns • 3-box Signals are unambiguous…. – BUT not every signal should be taken

• 1-box p patterns are harder to define • Signals put you in the right frame of mind • Point and Figure analysts – Look left for Support or Resistance – Look L k lleft ft to t see if it is i partt off a bigger bi pattern tt – Look for common Point and Figure patterns

• Use the Trend lines to confirm or reject signals

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Point and Figure Trend lines Trend lines vital for Point and Figure g analysis y Two ways to draw Trendlines: • Subjective – Lines can placed subjectively to show trend – Can be used on 33-Box but mainly on 11-box

• Objective Obj ti – On 33-box charts only – not possible on 11-box • Lines drawn at 45 45°° from tops and bottoms – 45 45°° = one box up/down, one column across – Defines D fi b bullll and db bear ttrends d 26

Subjective on 11-Box – S&P500

Objective 45° 45° on 3 3--Box – S&P500

45°° Trend + Internal Lines 45

Trends & Internals - Nikkei

Trends & Internals - Dax

Trends & Internals – Dax (h/l)

Trends & Internals on Oil

Advantages of 45° 45° Trend Lines • • • • • • •

Can be drawn immediately after top/bottom They are strengthened if touched They are objective - can’t can t argue with them They alternate and carve up the chart Make M k chart h t easier i tto read d Help accept or reject Point & Figure signals Help you see the current trend easily

Let’s see if you can recognise the trend ! 34

Uptrend or Downtrend?

P&F says Uptrend

Here it is the right way up !

And here it is now !

Point and Figure Scaling • P&F charts can be Arithmetic or Log g – Arithmetic • Box size same throughout the chart

– Log • Box size increases and decreases as p price rises and falls

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Log Scaling • Old Traditional method – Change box at key levels • For Example: – Price 0 – 20 use 1/2 point box – Price 20 – 100 use 1 point box – And so on.

– Brave, but flawed f attempt at a sort off log scaling • Problems – – – –

Too arbitrary Box changes not smooth Invalidates 45 45°° trend lines Makes construction difficult and incorrect

• Correct Method for log scaled P&F charts – Make box size a percentage 40

Arithmetic Chart – D. Boerse

Log Scale Chart – D. Boerse

Log or Arithmetic? • Log better: better:-– For medium and long long--term analysis – Where large rise and fall – Where rise has been exponential

• Arithmetic better: better:-– – – –

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For linear price rises For charts in a price range (e.g. Bonds) For intraday charts especially tick charts F Forex For F

Multiple Time Horizons • Changing the Box Size changes the Sensitivity • Changing Sensitivity changes the Time Horizon • Obtain Short, Medium and LongLong-term view from same data

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2% x 3 LongLong-term View

1% x 3 MediumMedium-term View

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0.5% x 3 Shorter Shorter--term View

0.25% x 3 ShorterShorter-term View

0.25% x 3 Hourly – more detail

0.25% x 3 - 15 minute

0.25% x 3 - 1 minute

Price Targets from Point & Figure • Unambiguous way to obtain price targets • Two Methods: – Vertical Count based on thrust from a high or low – Horizontal Count based on width of top or bottom

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Vertical Target • Based on thrust from a low or a high g – Count number of boxes in thrust column – Multiplied by box size and reversal – Add to low or subtract from high of previous column

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Horizontal Targets • Based on width of bottom or top pp pattern – Count number of columns across pattern – Multiplied by box size and reversal – Add to low or subtract from high of pattern

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How to use Targets • Targets and trends go together – Targets with trend tend to be achieved – Targets g against g trend tend not to be achieved

• Achieved and unachieved targets tell you – Trend strength/weakness – Warn of trend deterioration

• Possible to have opposing targets

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Vertical & Horizontal Targets

Targets - Dax

Targets - WTI Oil

Targets - WTI Oil – shorter term

Targets - Euro 100pip x 3




Targets - Euro Hourly 10pip x 3

Targets - Euro 1minute 10pip x 3

Risk--Reward Ratios Risk • Objective Targets allows you to calculate Risk Reward Ratios: 1) Reward = Target – entry price and

2) Risk = entry price – exit price • Risk Risk--Reward ratio = Reward / Risk • Helps you decide – Whether to take the trade – What Point and Figure stop level to use

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Risk--reward ratio at signal Risk

Risk--reward after signal Risk

Risk--reward after another signal Risk

Target Acheived

Works for Down Targets too

Clearer Relative Charts • Point and Figure is very good for Relative Strength • Same advantages as price charts – Clear signals – Objective trend lines – Objective targets

• Works best if Relative Strength is normalised and log scale used

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R/S BMW / Dax

R/S Fresenius / Dax

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R/S RWE / Dax

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Ideal for finding Opportunities Clear-cut signals Clearg and trends make Point & Figure ideal for scanning • For example you could easily: – Scan the Stoxx 600 to look for: • • • •

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P&F Double Double--bottom sell signals With Risk Reward ratio greater than 2 and 45 45°° Trend is down and % target > 10%

Rhoen--Klinikum Rhoen

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Allianz

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Deutsche Lufthansa

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To Summarise • 3-Box charts allow objective application of tools • Therefore the analysis is objective – – – –

Unambiguous g signals g and p patterns Objective 45° 45° trend lines Unambiguous targets Objective riskrisk-reward ratios and stops

• Better Relative Strength analysis • Perfect for Scanning stock universes

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New Point and Figure Techniques Indicators of Point and Figure • Most exciting recent development • Answers many criticisms of P&F – No volume – No moving averages – No indication of how overbought or oversold it is

• Indicator ‘periods’ measured in columns not time • Allows any indicator to be drawn – – – –

Moving g Averages g Bollinger Bands Parabolics Oscillators • MACD, RSI, OBOS etc.

– Volume based indicators like OBV – Directional Movement – Etc. 81

Moving Averages on P&F • • • • •

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Should always be based on log scaled P&F charts Use centre column value to calculate Lengths measured in columns not days etc. Can use one or two averages Crossover tells of trend change, then look for next Point and Figure signal

20 column moving average



5 and 8 column

Parabolic SAR on P&F • • • • •

Wilder’s standard .02 acceleration 0.01 works well Worth experimenting with others Smaller the factor, the longer longer--term the SAR H l you tto kknow which Helps hi h P&F signal i l tto ttake k

• Take next Point and Figure g signal g

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Parabolic SAR .02 1% x 3

Parabolic SAR .01 1% x 3

Bollinger Bands on P&F • Use ¼ or ½ period Bollinger suggested – E.g. 5 or 10 columns rather than 20 days

• Best to use high/low g construction • Shows: – Trend strength and overbought/oversold – Highlights low volatility congestion - SQUEEZE

Bollinger Bands - Oil

Bollinger Bands - Dax

Oscillators and other lines • Similar calculation method allows other indicators: – – – – – –

Overbought/Oversold RSI MACD Directional Movement OBV Etc.

• Shows – – – – 93

How overbought/oversold the Point and Figure chart is! How overstretched the column is Divergence If there is volume behind the column

Overbought/Oversold

MACD 12,26 on 1% chart

On--Balance Volume (OBV) On • • • •

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Takes column volume into account Shows the volume behind the move Confirms or rejects Point and Figure breakouts Tells you the significance of the column

OBV - Divergence

OBV – Lack of Volume

OBV – Confirmation

Directional Movement • ADX as well as +DI and –DI • ADX tells you Point and Figure trend strength • +DI and –DI give you buy and sell signals

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Directional Movement

Summary of Indicators of P&F • Use any of your favourite Indicators – MACD, Stochastic, RSI, OBV etc.

• Remember there are two variables – Indicator length in columns – Point and Figure box size/reversal

• Both change the time horizon • The Point and Figure charts must be log scaled

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That’s it ?

Not quite !

Thank you ! Jeremy@updata co uk [email protected]

Long--term S&P Long

Long--term S&P Long

Medium--term S&P Medium

Short--term S&P Short

Shorter--term (60min) S&P Shorter

Shorter--term (1min) S&P Shorter

Medium--term Dax Medium

Short--term Dax Short

Short--term (60min) Dax Short

Short--term (1min) Dax Short

Brent Crude $1 x 3

Brent Crude $0.5 x 3

Brent Crude (60min) 25c x 3

Brent Crude (1min) 10c x 3

Bund 0.5 x 3

Bund 0.25 x 3

Bund (60 min) 0.1 x 3

Bund (60 min) 0.1 x 3

Bund (60 min) 0.1 x 3

Gold $10 x 3

Gold (60min) $1 x 3

Gold (1min) 50c x 3