To be a good forex investor, you must understand how the market moves, and why. One of the most popular methods to represent price information on charts is called point-and-figure. Time scales are not always the same and the vertical scale is designated for price- which the horizontal scale measures the number of price reversals and movements, yet does not say anything about the time when they have started or ended. Sound interesting? Read on…
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Forex Point-and-Figure Charting Solutions
What Is Point-and-Figure?
Point-and-figure is a method to represent the price information on charts. It is like Japanese candlesticks, bars and lines but different. It does not use the time scale at all. While the vertical scale is still designated for price, the horizontal scale measures only the number of price reversals or movements and says nothing about the time when they have started or ended.
At first, such charts may seems strange and alien to a currency trader, but point-and-figure charts are the perfect noise filters and display only information that is really valuable — the prices big enough to bother about. And a trader has a full control of what price changes he wants to be informed of.
Point-and-figure charts are often call P&F or PnF or simply XO. The name XO goes from the classic way such charts are drawn — the bullish movement is represented by the column of X’s, while the bearish movement is shown with a column of O’s. Of course, nowadays, almost any symbol or just a colored box can be used to chart point-and-figure movements.
To start drawing a P&F chart, first, it is necessary to decide the box size — the price change that would be big enough to draw as either X or O on the chart. Usually, the box size is chosen as 10 pips in Forex trading. Of course, any box size can be used — 6, 50, 100 or even 1,000 pips. The bigger is the box size more filtered the P&F chart will be and less movements it will contain. The smaller is the box less filtered becomes the price and more price movements get pictured on the chart.
Once the size of the box is chosen, the starting point is decided can the drawing can be started. When the price goes up 10 pips up (let us consider the box size = 10) an X can be drawn on the chart. When the price goes up another 10 pips, a new X is drawn on top of the first one and so on. If the price fluctuates within 10 pips, nothing is drawn on the chart. As you see, the filtering power of the method is obvious. To draw a bearish movement, it would be necessary to put an O for every 10 pips that the price goes down.
In addition to the box size, another important parameter is chosen by a trader — reversal size. The reversal size is the number of boxes that the price has to go against the current movement to end it and to start drawing a new one in the opposite direction. The reversal size of 3 and 4 is quite common but any integer number equal or greater than 1 can be chosen as the reversal size.
Let us consider the reversal size = 3. If the bullish movement (a column of ascending X’s) is currently being drawn, then to qualify for a reversal, the price has to go down by 3 × 10 = 30 pips. And if it does, the first O is drawn in the next column, one box below the top X of the previous column (the price went down); additionally, two more O’s are drown in the same column below the first O as it was the movement of 30 pips, which for a box size of 10 pips means 3 boxes.
The process continues ad infinitum. As a result, a trader sees a lot of X’s and O’s plotted on the chart — they represent the price changes in pure form and can still be analysed with the conventional technical analysis tools, for example — chart patterns. You can scroll down to see several examples of the P&F charts plotted in different FX trading software.
Software P&F Solutions
Only 4% of this blog’s readers prefer using point-and-figure charts to trade Forex. One of the probable reasons for this can be the fact that P&F charts are not supported by many trading platforms. For example, neither MetaTrader 4 nor MetaTrader 5 provide point-and-figure view as a part of their default toolsets. Fortunately, there are numerous charting solutions to draw Forex point-and-figure charts. It is also a very good thing that you are not obliged to trade using the same platform which you use for charting, so your choice should not be limited by your broker. Here, I will present several ways to get P&F charts for your analysis. All charts (except Oanda’s) display EUR/USD with box size set to 6 standard pips and reversal set to 3.
Non-MetaTrader Solutions
DealBook 360 from GFT Forex offers rather simple way to show P&F charts. No time data is displayed on the chart but the box/reversal size customization is available. The program can also calculate the optimal box size depending on the symbol trading range. The interface is a bit confusing but nothing too complex.
Point and figure is a type of charting technique that is commonly used in technical analysis in an attempt to predict financial markets. This type of charting technique is unique in the way that it does not plot price against time- a process that most methods do. Much like range bars, point and figure charts only consider price, and they do not consider time. Point and figure plots prices against the changes in the direction by plotting a column of X as the prices continues to go up while a column of O charts the prices falling.
The point and figure charts are made of by deciding which value is represented by X and which by O. Any and all price changes below the values are not considered in so the point and figure method acts as a type of filter to weed out smaller, less significant price changes. The charts changes when the pricing changes direction by the value of a particular number of Xs and Os.
There are several different methods used to determined the pricing objective on a point and figure chart- the most popular is the vertical and horizontal count method.
This technique is well over 100 years in the making/development. Hoyle was the very first to write about the point and figure method and showed charts in is 1898 book titled ‘The Game in Wall Street’.
Point and figure charts are very easy to understand and it takes mere minutes to adapt to this type of charting. It cuts straight to the point and focuses on what really matters- the price.
Do you use point and figure charts to following pricing? Tell us how you got started.
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