$50
3 pips
$50
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Although not as commonly used among today’s personal forex traders, the point and figure chart has been a technical analysis staple among professional spot forex traders for many years. Often, this chart would be painstakingly constructed throughout the trading day as such traders listened intently to spot prices trading through their forex brokers’ voice boxes.
These Point and Figure charts would usually be made by hand on pieces of graph paper that eventually got taped together and folded to form a detailed map of the market’s many reversal points. Times may have changed since the advent of electronic forex trading and real-time charts, but it would truly be a shame to let this especially useful charting technique go the way of the dinosaur.
Point and Figure Chart Benefits
- Simplicity of construction.
- Only price matters since time does not get charted.
- Only price reversals of a chose size matter, which smoothes the chart.
- Common patterns generate clear buy and sell signals.
- Trends become easy to identify.
- Price objectives can be easily computed.
Constructing a Point and Figure Chart
- Step 1: Select a “point” or unit of price to be represented by a single box on the graph paper.
- Step 2: Place an “X” in a box to indicate upward movement or an “O” to indicate downward movement.
- Step 3: Start a new column when a price reversal of three points or more occurs.
Useful Point and Figure Chart Patterns
By looking for common patterns that show up on Point and Figure charts, a trader experienced in reading them can readily generate buy and sell signals for that currency pair that allow them to trade with greater objectivity. Furthermore, traders can easily calculate price objectives by using either a vertical or horizontal box counting technique.
- Buy Signals: Generally a higher bottom, then a higher top.
- Double Top
- Triple Top
- Spread Triple Top
- Bullish Triangle
- Bullish Catapult
- Long Tail Down
- Low Pole
- Sell Signals: Generally a lower top, then a lower bottom.
- Double Bottom
- Triple Bottom
- Spread Triple Bottom
- Bearish Triangle
- Bearish Catapult
- High Pole
Trading With the Trend
Even though a buy or sell signal might be generated, the trader might still choose to refrain from following any signal that did not agree with the direction of the underlying trend. After all, “the trend is your friend”, as the popular market saying goes.
Traders can readily use their Point and Figure chart to assess this trend factor for a bullish or rising market by drawing a 45-degree line upwards from the point of the previous major low. Any sell signals seen above this line would then be ignored, while buy signals would be taken.
For a bearish or falling market, the similarly-slanted line would be drawn downwards from the preceding major high. Any buy signals occurring above this line would be overlooked, but sell signals would be traded on.
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