How to read PF charts I
Point & Figure charts consist of columns of X's and O's that represent filtered price movements. X-Columns represent rising prices and O-Columns represent falling prices. Each price box represents a specific value that price must reach to warrant an X or an O. Time is not a factor in P&F charting. These charts evolve as prices move. No movement in price means no change in the P&F chart. In classic 3-box reversal charts, column reversals are further filtered requiring a 3-box minimum to reverse the current column. The 3-box Reversal Method is the most popular P&F charting method. Articles in Goldonomic are base on this method.
P&F charts provide a unique look at price action that has several advantages. P&F charts:
- Filter insignificant price movements and noise
- Focus on important price movements
- Remove the time aspect from the analysis process
- Make support/resistance levels much easier to identify
- Provide automatic and subjective trendlines
On a P&F chart, price movements are represented with rising X-Columns and falling O-Columns. Each column represents an uptrend or a downtrend of sorts. Each X or O occupies what is called a box on the chart. Each chart has a setting called the Box Size, which defines the price range for each box.
Each chart has a second setting called the Reversal Amount that determines the amount that a stock needs to move in the opposite direction to warrant a column reversal. Whenever this reversal threshold is crossed, a new column is started right next to the previous one, only moving in the opposite direction. Goldonomic uses 3 box reversals...only when 3 boxes can be filled, another column is used.
P&F charts do not show time linearly. In contrast to bar charts, the spacing between price changes will not be symmetrical. The chart evolves only when there is a price change big enough to warrant new X, a new O or a new reversal column. Chartists can view the passage of time on a monthly basis. Numbers and letters on the chart indicate when a new month has begun. For instance, the number "2" shows where February started. The letters "A", "B", and "C" are used to indicate beginning of October, November, and December.