the classic US scaling system is widely used, and the standard system (given in thetable above) is an extrapolation of this.
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Drawing Point-and-Figure Charts
Extension of the standard scale
What you also see is that the previous table consists of repeating numbers. For the price rangelimits the repeating numbers are 29, 60, 140 and for the box sizes 1, 2, 5. With those numbersyou can – by multiplication by 10 – get to any scale-values you want. For example, the Dow ina range of 6,000 (better not!) and 14,000 (hopefully) you use simply a box size of 200, foundby multiplying the last row on the table by 10.=====Example 1.1 – Variable box sizes
The scale is based on areas made out of 101 boxes, namely:•••
6 to 14, box size 0.2, (40 boxes)14 to 29, box size 0.5, (30 boxes)29 to 60, box size 1, (31 boxes)
then in order to get the scale for bigger values you multiply the range limits and the box size by10, 100, 1000, 10000 etc. If you want a scale for smaller values you divide range and box sizesby 10 or 100.Let’s say that you want a scale for a stock that traded between 230 and 780. You multiply theabove values once by 10, and you get:•••
60 to 140, box size 2, (40 boxes)140 to 290, box size 5, (30 boxes)290 to 600, box size 10, (31 boxes)
then you multiply by 10 once more to get•••
600 to 1400, box size 201400 to 2900, box size 502900 to 6000, box size 100.
Now you take values that allow the inclusion of 230 to 780. The result is thus:•••
140 to 290, box size 5290 to 600, box size 10600 to 1400 step, box size 20
That’s it!=====
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The Complete Guide to Point-and-Figure Charting
2. How to start a new chartStrategy 1
Wait until 3 boxes can be filled and decide based on the closing price and the range (highest highto lowest low or, if not available, highest close to lowest close) whether to use Xs or Os. If closeis higher than the mid-point of the range, use X and if close is lower use O. If on the first day itis impossible to fill 3 boxes, wait more days until this can be done. The decision to use Xs orOs for the first column is then based on where the last box is drawn. If it is filled on the highside, use X, if it is filled on the low side use O.Strategy 2 (simplification)
If high and low are available: take first available price data and decide on range (high to low)whether to use Xs or Os. If close is higher than the mid-point between high and low, use X andif close is lower use O. We use this method in our computer programs.3. When can the box be filled ?
The expression box has its origin in the use of a paper with grid lines for manual charting. Thebox number refers to the number on the vertical price-scale identifying the box. Testing whethera box can be filled depends on the direction of the price move. Two cases exist, either you comefrom above, testing for Os (falling prices) or you come from below, testing for Xs (rising prices).The box can be filled if and only if the price range – defined by the high and low – includes thebox number.Therefore:•
X – the price used in the charting process (normally the high of the day) has to be higherthan or equal to the box number in order to draw the X.
•
O – the price used in the charting process (normally the low of the day) has to be lowerthan or equal to the box number in order to draw the O.=====
Example 1.2 – Testing when a box can be filled
Assume we are testing if box 40 can be filled. In the case of:– testing for rising prices the X can be drawn if the high is higher or equal to 40; or– testing for declining prices the O can be marked if the low is lower or equal to 40.=====
36
Drawing Point-and-Figure Charts
4. When does a reversal occur?
The reversal occurs when no new same symbol can be added to the current column; instead, acertain number – traditionally 3 – of boxes can be filled in the opposite direction, starting on abox one higher in the case of a reversal from O to X or one lower in the case of X to O.Note that in order for the box to be filled, the price has to touch or move beyond the limit of thebox. The following graphic serves as an illustration. The dots refer to the boxes that have to bechecked.Figure 1.3 – Reversal patterns
Current column consists of OsCurrent Column
XX OXXX OX OX OX OX OX OOX OOO
•
Check if box can be filled
Current Column
XX OXXX O X O X OX O X O X OO X OOO
•••
2. Check reversal
1. If box can’t be filled
Current column consists of Xs
•
XXXXX OX OXX OX OXOX OOCurrent Column
If box can’t be filled
Check if box can be filled
XXXXX OX OXX OX OXOX OO
•••
Then check reversal
Current Column
37
The Complete Guide to Point-and-Figure Charting
Advanced topics of chart constructionPrice data used
In the following section, we answer questions related to the data input on charts. Ourinstructions are geared towards the most common type of charting which uses end-of-day data.However, some traders use different time horizons than an entire trading day.Either you use:••
price intervals, typically high, low, oryou do real-time charting and use the last price only.
Moreover, in charting of illiquid assets only the close or settle can be used, because high andlow for the day do not exist.Real-time charting is based on a continuous stream of prices, usually the prices at which the lasttransaction took place. We use this last price instead of high and low when we draw the chartand test it against box limits. On the other side of the spectrum we have prices such as real-estateindices or illiquid bonds. Here, too, we use the published price available instead of the high andlow.The following decision rules are based on the typical use of high, low, close for end-of-the-daycharting of liquid stocks. However, in the other cases mentioned above you would substituteboth high and low with the price given, either real-time or close/settle.Summary of price data used for p&f charts
•••
Typical end-of-day (EOD) chart: high, low, close.Real-time: last (use as substitute for both high or low when applying rules for thetypical EOD).Illiquid asset: close or settle (use as substitute for both high and low within EOD rules).
Crossing of box size levels
This is a relevant point if you use the classical scale and do the chart manually. Remember thatthe standard scale uses:•••
box sizes of 1 for prices between 29 and 60,box sizes of 2 for prices between 60 to 140 andbox sizes of 5 between 140 and 290.
Therefore, when your stock is hovering around a level like 60, 140 or 290 you would have topay particular attention to the box sizes.38
Drawing Point-and-Figure Charts
Let’s look at the case where your stock – in which you hopefully have a short position – trades150 points down from 240 to 90. For each down move of 5 points until 140 you will have to filla box with an O. From there on, a 2 point move fills a box, as the new box size is now 2 points.So for the fall from 240 to 90 you would have to fill 45 boxes (20 from 240 to 140; 25 from 140to 90). In comparison to a 150 point crash from 290 to 140, which would only affect 30 boxes.The secret is to pay attention to those levels, that’s all. First take a quick glance at the scale, thenfill in the appropriate boxes.Adjusting a chart for a dividend or capital issue
In the case of bonus issues, rights issues, extraordinary large dividends or any other materialchange in the equity-structure, the chart should be adjusted to reflect that change. As a rule ofthumb: dividends, both stock and cash, of less than 10% are ignored.Manual charting
For manual charting you would calculate a new scale, e.g. for a 1 to 2 split, the new scale wouldhave scale values of half the old ones. You would then draw the new scale on the right hand sideof the chart and use the new scale for the ex-split values. The same would be done for thedividend adjustment.In adjusting a chart manually, it should always be borne in mind that some of the chart patternsin the old chart can disappear in the new chart. And in some cases, an adjustment will evenchange a chart from being bullish to being bearish or vice versa.The problem arises when the stock data after the split gets situated exactly in a range where boxsize levels are crossed, most likely from above 200 to below 100. This is obviously a problemwhich is only temporary. If you feel that it disturbs your analysis, it can be overcome by usingtwo charts in parallel, one with the old scale and one with the new scale. Then you have toinversely adjust the prices to be used in the chart with the old scale.Computer charting
If you use a computer for your charts, you would simply adjust the data-series or download itafter the split date – as data providers normally adjust data rapidly and correctly – and have thecomputer redraw the chart from scratch.Time indication on charts
In the chart over the page all the basic features of a point-and-figure are included. On both sidesof the chart the box size scale is displayed. A trend line consisting of ‘+’ is also included.
39
The Complete Guide to Point-and-Figure Charting
Chart 1.2 – EuroSTOXX50 [.STOXX50E]
Table 1.3
Month codesJan
1
Feb
2
Mar
3
April
4
May
5
June
6
July
7
Aug
8
Sept
9
Oct
A
Nov
B
Dec
C
As mentioned, point-and-figure ignores the passage of time. However, for the purpose ofcomparability, but not for trading, letters are often used to mark the start of a new month, or aline to mark the start of a new year. Examples of both are shown above, with years indicated byvertical lines and, at the bottom, the last two year digits are printed. Months are drawn insidethe chart, substituting Xs or Os with the month codes show in the table above right.Another practical example
Just to make you an expert in charting, we have included another example: mmO2 PLC[OOM.L], The data for mm02 in this period from January to February 2002 is printedopposite. It is in the format of: date/open/high/close/volume.Starting on page 42 we will plot this data on a p&f chart.40
Drawing Point-and-Figure Charts
Table 1.4 – Example price data for mmO2
Date
Open
High
Low
Close
Volume
02-01-200203-01-200204-01-200207-01-200208-01-200209-01-200210-01-200211-01-200214-01-200215-01-200216-01-200217-01-200218-01-200221-01-200222-01-200223-01-200224-01-200225-01-200228-01-200229-01-200230-01-200231-01-200201-02-200204-02-200205-02-200206-02-200207-02-200208-02-200211-02-200212-02-200213-02-200214-02-200215-02-200218-02-200219-02-200220-02-200221-02-200222-02-200225-02-200226-02-200227-02-200228-02-2002
8689.1929289.619187.587.585.258586.586.5386.7585.25858281.0382.6381.2881.2879.5376.2877.2878.257575.0370.7271.9772.2271.571.5368.0267.9868.2765.9864.946362.9861.7361.7365.2367.77
90.2591.7592.7592.2592.591.587.7589.587.5909088.2588.2586.586.848384.2583.318481.9579.538080.1678.577675.0374.25757573.6672.3869.7570.568.4866.564.9463.7564.2563.75676868.06
8687.2588.758888.586.6685.2586.584.8184.58085.98584.2582.5808180.25797975.576.227574.7572.25706871.3271.2569.566.166.566.565.2562.55858.9861.256061.1863.564.25
8990.8991.2590.7291.5689.2286.588.585.03888886.2585.5385.2584.9481.5382.4781.2579.4380.257876.7579.1375.5273.8171.6171.773.2871.571.168.2767.9467.2566.0464.6660.046262.4161.4564.296466
32571772966082248322142480453848149584448104319984134468912483925163486848876452320735808007209775210449303227617188483381201052784089484491226047040690779127435304894711624630621048532556048750840101264192555560808317691255047380459501524990594815359856068061024785120645773471670843168109770192715202403858411684168552139078592984759204274703241
The Complete Guide to Point-and-Figure Charting
1. Constant box size
First, use the simplest scale, namely a constant box size of 1. Your grid will be made up of boxeswhich all have the same size 1, with the lowest box being 57 and the highest 93 (the range ofthe mmO2 data).Below is the result of charting the data. We hope you get a chart that looks exactly the same.Chart 1.3 – OOM P&F chart with a constant box size of 193929190898887868584838281807978777675747372717069686766656463626160595857
.............................X.X..........................XOXO.........................1OXO__X______________________.OXOX.XO......................O.OXOXOX.......................OXOXOXO......................O.OXOXO..................._____O_OXO___________________.......OXOX.........................OXOXO........................OXOXO........................OXOXO................._______O_O_OX________________...........OX2..........................OXOX.........................OXOXO........................O.OXO............._____________O_OX____________...............OXO..........................OXO..........................OXO..........................OXO..........._______________OXOX__________...............OXOXO........................O.OXO..X.......................O.O..XO........................O..XO.....___________________O__XO_____...................OX.X.........................OXOX.........................OXOX.........................OXOX......___________________OXO_______...................OX...........................O......................................
93929190898887868584838281807978777675747372717069686766656463626160595857
You might have fogotten to include the ‘2’ on line 79 indicating the start of February (month‘2’) and the end of January (month ‘1’). The marking of months or any other time reference isnot strictly necessary in p&f charting, because, as you know by now, p&f charts ignore thepassage of time. Neverthless, it is a common convention to mark new months with a number,because traders often like a maximum of information.The numbering for months is very simple: 1-9 for January to September, and then the letters A,B and C for October, November and December respectively.42
Drawing Point-and-Figure Charts
2. Standard box size
Now, and this is very important for your learning process, do the same chart with the standardscale. Remember the standard scale changes the size of the boxes. The size of the box increases– although in a staggered way – with the increase of the price.Look up the box values in the Standard box size table on page 34. The information that you takefrom that table is that the boxes will have the size of 1 between 29 and 60, and 2 between 60and 140. Now, using the standard scale, the chart should look like this:Chart 1.4 – OOM with standard scale94929088868482807876747270686664626059585756
............X___________1O...........OX..........OXO.........OXO........_OXO________.O.O...........O...........O...........2X.......___OXO______...OXO.........O.OX..........OX..........OX....._____OX_____.....OX..........OX..........O......-----------------------
94929088868482807876747270686664626059585756
If you succeeded in drawing the two charts correctly, you have shown that you understand thebasics. Congratulations! There is nothing more to learn in respect of drawing the basic chart.What you do still need to learn is how to insert trend lines and, most of all, how to interpret ap&f chart and apply it to real trading.You have observed with the above two charts two important aspects, namely that:1.
The standard scale is easy to do, and
2.
The bigger the box size, the fewer columns, as reversals are less frequent.
43
The Complete Guide to Point-and-Figure Charting
SummaryWe have noted the basic characteristics of point-and-figure charts:••••
Xs indicate rising prices.Os indicate falling prices.A column can never include both Xs and Os.Columns of Xs alternate with columns of Os.
Concise instruction for creating point-and-figure charts
1.
If the current column consists of Xs, check if new Xs can be added, or, if the currentcolumn consists of Os, check if new Os can be added. If they can, add them.
2.
If no new same symbol can be added to the current column, check if a reversal hashappened and if so, start a new column with the opposite symbol. If no reversal hashappened, wait for the next day’s price data.
3.
Interpret the chart for new buy or sell signals.
The above can also be represented as a flow chart:Figure 1.4 – Flow chart describing p&f chart constructionCan the current column becontinued with the samesymbol, either X or O?
Yes
Fill corresponding boxes
NoDoes a reversal occur?No
Yes
1. Shift column2. Fill boxeswith oppositesymbol
analyse
gotonextstock
What about volume?
Point-and-figure charts do not display volume in the way that bar-charts do. In our opinion thisis not problematic, because volume often switches between being a leading or a laggingindicator and so is no use at all for predicting price moves. Moreover, we have not seen anyscientific study that shows that volume can be used to forecast price moves. And one moreconsideration: reported volume figures are flawed because they are not consolidated withtrading volume generated by derivatives or OTC trading.44
Drawing Point-and-Figure Charts
Computerised chartingWith the proliferation of PCs it is rare to find an active trader who does not have at least twocomputers, a portable and a PDA at hand! Recently we counted the number of PCs in our officeand at home, and the number was surprising. But one can spend money in much more silly ways,and of course we have somehow to finance the turnaround of the tech markets. So let’s buy morehardware!But jokes aside, a good computer with fast internet access is indispensable. Therefore in thisbook we cover the aspects of computer application to point-and-figure extensively.Price dataIf you are computer literate, and willing to spend the time and money, historic price data isavailable from a number of data vendors. Depending on the vendor, the data may go backseveral decades and be available for download to your computer, or it may be on CD ROM.Current day data would be downloaded daily to update the historic data accumulated on yourhard drive or on the CD ROM. Some databases give access to the historic data for free, the bestknown being Yahoo.Recommended data vendors
••••••••••
ADVFN (www.advfn.com).E-Signal (www.esignal.com), covers all major markets for a reasonable price.Global Financial Data (www.globalfindata.com), expensive though complete.LSE (www.londonstockexchange.com).MetaStock (www.equis.com): with Reuters Data Link.Olsen (www.olsen.ch) for tick data.Paritech (www.paritech.co.uk).TickData (www.tickdata.com): for US tick data.Updata (www.updata.co.uk): Trader II Professional’s own data feed.Yahoo (finance.yahoo.com): in combination with the utility Hquote.
Software programsYou will need a software package that can create p&f charts from the daily high and low pricedata. There are several that do an excellent job. Often they also generate bar charts, candlestickcharts, do technical analysis, and many even allow the user to view fundamental information onthe selected investment.45
The Complete Guide to Point-and-Figure Charting
A good p&f software program should include:•••
Different possibilities to scale a chart (logarithmic, linear, user-defined).Drawing of automatic trend lines.Facility to access (in a user-friendly way) many different historical price series.
Robust software packages that create p&f charts include MetaStock, PFScan and UpdataTechnical Analyst and Updata Trader.In each package you select the box size or scaling, and number of box reversal desired, and thesystem will automatically produce the chart. The charts generated from each program areaccurate and very useable.Even though each product produces excellent charts, there are significant differences in priceand features of each software package. Some versions allow for intraday charts, others not.Some are configured so as to be connected directly to specific data feeds; others are independentof data vendors and feeds.Recommended software programs
We have extensively tested the high end products of MetaStock, PFScan and Updata, and canhappily endorse all three for the chartist interested in utilizing a PC to maintain point-and-figurecharts.•
MetaStock (www.equis.com): for very basic point-and-figure.
•
PFScan (www.pfscan.com): a software boutique’s outstanding application with uniquefeatures for scanning entire markets for breakout signals.
•
Updata (www.updata.co.uk): probably the worlds best point-and-figure charts.Moreover, Updata is an integrated trading platform, one of the best we know.
Example screen shots from each of these software programs – two in each case – appear on thenext 6 pages.
46
Drawing Point-and-Figure Charts
MetaStock
Figure 1.5 – Banco Santander [SAN.MC] with volume displayed by MetaStock
This is the basic screen layout of the MetaStock program. Because it is a universal technicalanalysis package it does not offer the advanced features one finds in PFScan or Updata.MetaStock p&f price-scales are always linear. They can, however, be changed in size.
47
The Complete Guide to Point-and-Figure Charting
Figure 1.6 – Ibex35 [.IBEX] and Repsol [REP.MC], both with volume, by MetaStock
As shown above, it is useful to be able to have various charts in different windows forcomparisons.
48
Drawing Point-and-Figure Charts
PFScanFigure 1.7 – PFScan with trend lines, counts and signals
In this screenshot of PFScan, you can see automatic trend lines (bullish support and bearishresistance), plus current resistance and support levels (on the scale at the right side).There is a list of additional indicators, price targets and signals shown in the right split-window.At the bottom are various buttons which allow the charts to be zoomed, analysed or to be testedfor signals and profitability.
49
The Complete Guide to Point-and-Figure Charting
Figure 1.8 – PFScan with trend lines, counts and signals
Here we have zoomed in on a chart to increase the visibility of the price targets, indicators andsignals. Note also that the most recent trading signals are indicated with framed boxes and thickhorizontal bars
50
Drawing Point-and-Figure Charts
UpdataFigure 1.9 – Updata, point-and-figure
In this window showing AstraZeneca [AZN] p&f chart, you can appreciate the aesthetics of theUpdata design. For this chart, a linear 20-point box size scale has been used. Updata allows ahighly flexible definition of the box size scale.
51
The Complete Guide to Point-and-Figure Charting
Figure 1.10 – Updata, point-and-figure with horizontal and vertical counts
One of Updata’s valuable features is the automatic performance of precise horizontal andvertical counts. The chart is based on a logarithmic box size scale.Note: further references for software and data can be found in Appendix 3 on page 249.
52
Drawing Point-and-Figure Charts
Subscription chartsBesides constructing the charts yourself, there are a number of independent services that offer‘ready-made’ p&f charts. We mention a couple of the better known ones below.Chartcraft
If you are interested in US stocks you can subscribe to the excellent products of Chartcraft(www.chartcraft.com). They range from annual long-term chart books providing chart historygoing back many years, to monthly chart books with less historic data, but more current charts,.They also offer weekly and daily email-based services, with the latest comments and charts.Their subscription charts are available for most US securities as Chartcraft is the oldest, largest,and most respected of the p&f charting services. All of their charts are also easily accessibleonline on the web.Stockcube
You can also subscribe to Chartcraft’s sister company’s service Stockcube(www.stockcube.co.uk), which provides online p&f charts for non-US stocks, currencies andfinancial futures. However, note that Stockcube creates its charts based on closing prices.Both Chartcraft and Stockcube are known for their immaculate products and professionalservice.For the professional trader we consider a subscription to such a service a nice to have. Mostespecially in order to complement your own charts, either drawn by hand or computer.
53
Chapter
2
Interpreting the charts
•
Buy and sell formations
•
Trend lines
The Complete Guide to Point-and-Figure Charting
Buy and sell formations
The basic chart patternsPoint-and-figure chart patterns are neither shrouded in mystery nor are they merely randomconfigurations, because they repeat themselves with statistical relevance.The cumulative actions of buyers and sellers, whether they are long-term investors, orspeculators, must necessarily be reflected in price changes. Every purchase and sale of a securityis made at a certain price level; this affects the trading price, and ultimately can change thetrading price. The method used to record these price changes is what causes the appearance ofrecurring patterns of Xs and Os in p&f charts. The ability to recognize and interpret thesepatterns provides the chartist with the knowledge of the correct position to take at any particulartime. These patterns are referred to as formations and range from very simple to very complexpatterns.Simple Buy and Simple Sell
The most basic of all formations – and necessary elements in more complex formations – arethe simple buy and simple sell formations; sometimes called the Double Top and Double Bottomformations.Figure 2.1 –