Point and Figure
A point and figure chart is a technique in
charting that disregards the passage of time and only
charts changes in prices. In constructing a point
and figure chart, a "box size" is first defined as the
minimum movement in prices that will occur before a plot
of the price change will occur. An "X" is
displayed when prices rise by the "box size" and an "O"
is plotted when prices fall by the box size. No
X's or O's are displayed if prices rise or fall by an
amount that is less than the box size.
Every column in the chart can
contain either X's or O's but not both. When prices reverse,
they must reverse by a reversal amount that is then multiplied
by the box size before a new column is created. A new column
therefore signals a change in the price trend. For Point and Figure Charts, only
significant prices changes are depicted on the chart. The usual
box size is 1 or 2 points for medium priced stocks and 3 to 5
points for higher priced stocks. Reversal amounts are usually
defined as being double or triple the box size.
The Point and Figure Chart allows
for a visually clear sense of support and resistance levels.
Breakouts from a particular level can give indication of where
the trend in prices is headed in the future. The longer a price
plot moves in a consolidation or sideways movement, the stronger
the reaction can be on a breakout. These charts allow investors to
analyze various price formations and spot buy and sell signals
through trendline penetrations and breakout from support or
resistance levels. Point and figure charts also
allow for a quick assessment of the overall trend of the
market and in potentially determining whether price is
at risk of reversal.
Below is a graph of
Louisiana-Pacific Corp during the same time frame only plotted
as a candlestick chart of daily prices.