What is a Point-And-Figure Chart
A point-and-figure chart plots price movements for stocks, bonds, commodities or futures without taking into consideration the passage of time.
Contrary to almost all other types of charts that mark the degree of securities movement over set time periods, point-and figure charts utilize columns that either consist of a series of stacked Xs or Os, each of which represents a set degree of price movement. The Xs illustrate rising prices, while Os represent a falling price.
As you can see from the chart below, technical analysts still utilize concepts such as support and resistance, as well as other patterns, when viewing point-and-figure charts.
BREAKING DOWN Point-And-Figure Chart
Point-and-figure charts often provide technical analysts with differently timed signals, relative to traditional candlestick or bar charts. While some analysts rely more heavily on the point-and-figure charts, others use these charts to confirm signals provided by traditional charts, in an effort to avoid false breakouts or breakdowns.
Key to point-and-figure charting is the box size, or the amount of price movement that determines whether a new X or O is added to the chart. For example, say the box size is 3. If the last X happened at a price of $15, a new one is added to the current column of Xs when the price rises to $18. Analysts typically match the box size relative to the stock’s traditional price ranges over time.
Notably, the line of Xs continues in the same column provided that the price continues to rise, and doesn’t breach a predetermined reversal amount, at which point, a new column of Os begins.
The same is true for a column of Os in a declining market; the column continues until the stock reaches the reversal amount, at which point a new column of Xs begins.
Charles Dow, founder of The Wall Street Journal, is credited with developing point-and-figure charting as a way to determine imbalances between equity supply and demand.
One of the foremost technical analysts specializing in point-and-figure charting today is Tom Dorsey, who founded the research firm Dorsey, Wright & Associates in 1987. He authored several books on the topic, including Point & Figure Charting: The Essential Application for Forecasting and Tracking Market Prices. Nasdaq purchased Dorsey, Wright in 2015 for $225 million.
Dorsey helped to popularize the use of point-and-figure charts with more traditional technical indicators, such as moving averages, relative strength and advance-decline lines. At one point, his research firm calculated an estimated 7.5 million relative strength charts daily, including charts that tracked relative price movements between foreign-equity markets.
In addition, Dorsey applied a proprietary relative strength analysis, partly based on point-and-figure charts, to build a series of so-called “smart beta” exchange-traded funds now owned by Nasdaq.