There are many different ways that you can display price movement on a chart in the new D2MX Charts tool (included in the d2mxIRESS, Bourse and Market Analyser platforms). You can use lines, bars, candlesticks, point and figure and swing charts. Today we’ll take a look at the point and figure charts in more detail. These may not be as widely used as other charting styles, but they do offer a range of benefits to improve your analysis and help you identify trading opportunities.
First of all it is necessary to understand how a point and figure chart is constructed. Most charting techniques display a chart with one bar or candle for each day of trading. Point and figure does not do this. Point and figure charting considers price movement only and time is irrelevant. It is not possible to locate what happened on a particular day on the chart. There is still a date scale at the bottom of the chart, but the spacing between months can vary dramatically.
While time is more or less ignored when using point and figure charts the important dimension of price movement is recorded in detail. Price movement is where money is made or lost and this is the key to point and figure charts. If price moves up by a set amount, then a green cross is drawn and every time price rises by this set amount another green cross is drawn. If you set a box size of 50 cents then an upward price move of $2 will be displayed as four green crosses stacked on top of each other. If on any day the price moves up 30 cents then nothing will be displayed for that day as the price did not move by the minimum amount.
When the price stops moving up and starts to move down a red circle is drawn in the next column to the right of the green crosses. Now when the price moves down by the set amount another red circle is drawn underneath the previous circle. In this way up trends are easily identified on the point and figure chart, by a column of green crosses and down trends by a column of red circles.
You can adjust the point and figure parameters with a right click on the chart and then select chart properties. Scroll down to find the Point and Figure Settings in the Parameter list. The box size controls the amount of movement required for a green cross or red circle to be drawn. It can be set as a percentage or in points (in most cases this is cents) controlled by the Calculation Settings. You can also control when the chart starts a new column by adjusting the Reversal periods. The settings that are shown above draw a mark every time the share moves 1% and starts a new column if the share reverses direction by 3%. Playing around with these parameters you can easily end up with a lot of crosses, or very few, depending on the settings you choose. This can make the chart look a little odd. Adjust the parameters until the crosses and circles are clearly visible on the chart.
One of the big advantages of point and figure charts is the removal of “noise” from the price action allowing the underlying trends of the share to be more easily seen. When you are analysing point and figure charts; trend lines, support and resistance lines are important and useful tools that are easily applied.
In the chart below Brambles (BXB) has a clear resistance level at $7.30 which it has remained below for a long period of time, in fact since sometime in 2010. There is also a strong support level at $6.10 which has held up for over a year. Trend lines can be drawn easily on the chart with a break in a trend line signalling a change in trend, just as it would be interpreted on any other charting style.
BHP Billiton (BHP) has been in a long term downtrend for more than a year and a break through this down trend line may signal the start of a new advance in BHP shares.
In ANZ Bank (ANZ) the break in the long term trend lines signalled the start of a strong move in the share price shown below.
Point and figure charts can be used to identify long term trends in shares as well as critical levels of support and resistance. By removing some of the noise of day to day price action these trends can be much clearer to see on the charts. It is certainly worth taking a look at point and figure charting to see if it works for the way you approach the markets.
By Jeff Cartridge