1. Chartered Market Technician Institute
Point and Figure

2. Point and Figure Charts Introduction
Very different from Bar & Candle Charts
Time is not a factor, the account for price only
Terminology
Point: refers to the location of the price plot
Figure: the ability to figure target prices from the points
Relatively simple to employ, only prices that meet the “box” and “reversal” size are used
The Chart reflects the High and Low, whenever important, which many feel is a better measure of supply and demand, rather than the open and close, which many feel to be arbitrary times

3. One Box (Point) Reversal
Price is Plotted on the vertical axis
Time is not scaled
Each square or “box” represents 1 point in the price
Plot is made only when price of box is touched or traded through
Change in plot to a new column is made only when price is trending in one direction and subsequently reverses by the box size or larger
One-step-back method (only in 1-box reversal charts)
Price reverses direction by the value of 1 box only and then reverses back in the previous direction, leaving an X & an O in the same column
See Figure 2-6 & 2-7 (next page)
See page 66 thru 75 for step by step construction

4. One Box (Point) Reversal

5. Box Size Multi-Box Reversal
Can be expanded or contracted depending on personal preference
The larger the box size, the less noise
The smaller the box size, the greater the detail
Multi-Box Reversal
Reversal can be different from box size
1 Point, 3 Box Reversal the most popular
X: used in columns when price is increasing
O: used in columns when price is decreasing

7. Time
With the start of a new month, a letter or number is used instead of an “X” or an “O”
Sometimes a year is recorded as well at the bottom
Point size recommendations:
1pt for prices btwn 20 & 100
.5pt for prices btwn 5 & 19.50
.25pt for prices less than 5
2pt for prices greater than 100

8. Figure 11.15

9. Point and Figure Charts key characteristics
“Box” & “Point” are used interchangeably
P&F does not take into account time or volume
Requires continuous time flow
Analyzes all price action
Disregards inactive period, concentrates on active
Screens out price action that has little predictive ability
S&P500 futures vs S&P500 cash

10. Old & New Methods
There are 2 variables used to determine Point & Figure Charts
Box or Point size
The number of boxes for a reversal aka “reversal amount” or “reversal size”
Early version was known as one by one
Box and reversal sizes were equal
Patterns were complex and open to interpretation
Accurate as it included all price action
Newer version known as the three point reversal
Did not require as much data flow, can be estimated from daily closes or high/low methodology
Some accuracy lost because intra-day trading ignored
Clarifies as well as it ignores noise
Two types are very different and require different rules and interpretation
Technically 3pt reversal not really point and figure as it does not rely on continuous data

11. One Box Reversal Point and Figure
No longer very popular
Patterns are not precise and require and experienced analyst to interpret
One advantage: The Count
Anticipating the expected move is done by measuring the width of the observed base
Consolidation/Congestion area of a one box chart
Observation: when price changes occur more frequently at lower level of range, odds favour an upside breakout and vice-versa Box and reversal sizes were equal
Trendlines are drawn in the same manner as with bar charts
Trendline breaks negate earlier observation

12. Patterns Point and Figure uses both traditional and unique patterns
Traditional: Head and Shoulders Top
Unique: Semi-catapult and Fulcrum
Semi-Catapult
It is a continuation pattern
Characteristics:
There is a preceding trend
A pause or pullback from the trend
Price then breaks through the price extreme of the preceding trend (the catapult point)
Trend resumes (Bullish examples: figures 3-3, page 117. Bearish examples: figures 3-5, page 118)
FULCRUM
It is a reversal pattern
Easily recognized
Holds a reliable count as it is contained by distinct walls
Other characteristics
A previous trend entering into a consolidation
Sideways price action near the trend extreme
A “mid-fulcrum” rally of short duration, approximately 15% of the previous trend, should be mistaken as turn in trend (results in a false break or false catapult)
Subsequent re-test of the trend extremes
A “catapult rally” above the mid-fulcrum rally (breakout from which is called a true or full catapult)
Fulcrum variations:
A Compound Fulcrum (2 Fulcrums side-by-side)
Delayed Ending Fulcrum (second Fulcrum lower than the first – ending diagonal triangle?)

13. See pages 167 to 170 in du Plessis

14. Steps to establishing a horizontal count on a 1-box chart
Look for a congestion pattern
Methods for measuring the width
Method 1 (best)
The count that has the most filled squares is used, not the longest row
Even blank squares are counted
No exact rules on where to start the count
Generally the longer the consolidation the more difficult to count due to smaller rallies and corrections which make it difficult to establish where the range began
Method 2 (preferred if number of rows with same number of x & o)
Count the width of each row in the pattern, average and round up by 1
The trigger is taken to be the row in the middle of the pattern
Method 3 (preferred if there are walls)
If the pattern has walls, count across from the start of the right hand wall to and including the left hand wall
Method 4 (prefered if willing to wait for breakout)
Count the width of the pattern at the breakout or catapult point
Either the width between entry and exit walls at the catapult point
Or the width of the pattern one row below the catapult point
Correlation between range and breakout, “The bigger the base, the higher the space”
Project the count up or down
Multiply the column count from step 2 by the box size
Add / Subtract this value from the row the count was taken
Wall: a vertical line marking either side of a consolidation
Count is the most valuable feature of the One Box Chart
Less precise than the 3 box chart counts

16. Action Points
Ideal Selling and Buying Points as outlined by Alexander Wheelan
When all of the following conditions appear in a one box point and figure chart, the ideal situation exists:
The technical position of the market is favorable
A clear and broad fulcrum appears after an extended trend
The extreme of the fulcrum fulfils the max count from the start of the previous trend
Fulcrum appears against major support or resistance
The catapult coincides with the break of a major trendline
The catapult occurs at a price level with little support or resistance in space following

17. Three Box Reversal Point and Figure
More popular than one point predecessor
Can be plotted from prices found in the newspaper
Close only method
More popular, only a row of X’s or O’s for the day
High/Low method
Close is ignored completely
Reliance on the trend
as long as extremes are made in the direction of prevailing trend, in accordance with the box size, counter trend extreme is ignored
If no new extreme, opposite extreme is examined for a potential change
See pages 95 to 103 for construction
Requires the knowledge of only a few basic patterns
Academics like it because these patterns can be tested
Can have only X’s or O’s in each column
See pages 80 thru 86 for construction
Due to asymmetry, reversals can be used as trailing stops

18. The Count in a Three-Point Reversal Chart
Less ambiguous and easier than 1 box charts
Two Methods:
The Vertical Count
The Horizontal Count
Doesn’t have establishment and activation stages like vertical count
Much price action is lost in the Three Box Reversal, less accurate than the One Box method

19. The Count in a Three-Point Reversal Chart
1. Vertical Count Calculation method
Choose a completed column of X’s (establishment):
The 1st move off a bottom
The second move off a bottom if it is part of a bottoming pattern
The completion of a mini-top in an uptrend
A second column of X’s if the 1st column is a short column
A significant X column breakout
Count the number of X’s in the column and calculate
Using a completed column, multiply the Xs by the box size and then the reversal size
Add this value to the lowest O in the column to the left of the counting column for your upside target
Unique to the Three point Reversal Method
DO NOT USE THE BOTTOM OF THE PRECEDING PATTERN, USE THE LOW OF THE PRECEDING COLUMN
Activate the count on a break of the counting column
Reinforces the trend

21. The Count in a Three-Point Reversal Chart
2. Horizontal Count Calculation method
2 methodologies
Cohen
Sexsmith (less popular)
Prerequisites
A previous trend
A topping or bottoming pattern
A Sideways consolidation
A turn in trend
Congestion Width determines the extent of the move
Cohen Methodology
Look for a congestion pattern after a trend, marked by walls
Count the number of columns across the pattern, including the walls
Multiply by 3 and the box size then add to the value of the lowest O
Establishment and Activation stages are identical
The exit column rises above the highest X in the pattern
Logic of the Horizontal Count: the larger the base, the higher the space

23. The Count in a Three-Point Reversal Chart
2. Horizontal Count Calculation method
Sexsmith (less popular)
Same logic as the 1 box horizontal method (find row with most filled squares)
Useful for continuation as well as reversal patterns
Risk and Reward:
1st unit of risk below preceding O column (assuming a buy for a 3 box P&F.
For a 1 box its below the count row
2nd unit of risk below the basing formation (assuming a buy)
Vice versa for a sell
(see page 254 for an example)

24. Risk/Reward

25. Pattern characteristics
Sloping bottoms are more bullish
Slopping tops are more bearish
See pages 129 through 133
Slopping tops and bottoms indicate indecision
The breakout/pullback or breakout/retest
One of the strongest P&F signals, reinforces the 1st breakout
See pages

26. Breakout/Re-test

27. Eight Standard Patterns
Double Top and Double Bottom
Rising Bottom and Declining Top
Triple Top and Triple Bottom
Ascending Triple Top and Descending Triple Bottom
Spread Triple Top and Spread Triple Bottom
Bullish/Bearish Triangle
Above Bullish Resistance/Bearish Support Line
Below Bearish Resistance/Bearish Support Line

28. Double Top/Double Bottom
Consists of only 3 Columns
Double Top:
Two advancing rows, One descending rows
Double Bottom:
Two descending rows, one advancing rows
Different nomenclature than for bar charts
“Top” designates the breakout point
Bullish Pattern
Signal occurs when the 3rd Column breaks above the 1st column
All other standard formations except lines have Double Tops or Double Bottoms embedded within
Davis found that 80.3% of Double Tops are profitable

29. Figure 16.11

30. Rising Bottoms & Declining Tops
Variation on Double Tops and Bottoms
Four Column pattern
Rising Bottom:
First column of O’s must be below the more recent column
Usually the 1st column of lows declines from a much higher level than shown
One possible variation is for the prior of X’s to be stronger
Declining Top is exact opposite
Davis found that 80.4% of Rising Bottoms are profitable

31. Figure 16.12

32. Triple Top and Triple Bottoms
Triple Top occurs when prices break above two prior highs, vice-versa for a Triple Bottom
Five Column pattern
Provides greater confirmation of a change in trend
Tends to be more profitable than a Double Top
Davis found that 87.9% of Triple Tops are profitable, 93% of Triple Bottoms

33. Figure 16.13

34. Ascending Triple Tops, Descending Triple Bottom
Varieties of the Triple Top/Triple Bottom
Triple Top:
Three rising columns, with the second rising column pushing to new highs
Two Separate Double Tops
Denotes a strong uptrend
Opposite for a Descending Triple Bottom
Davis found that 79.5% of Ascending Triple Tops are profitable, 83.3% of Triple Bottoms

35. Figure 16.14

36. Spreading Triple Tops & Bottoms
More complicated varieties of the Triple Top/Triple Bottom
Fairly infrequent occurrence
Requires at least six columns
Similar to the Fulcrum as it represents a congestion zone followed by a false breakout and then renewed congestion
Requires three separate tops with one or more lesser tops between the major ones
Breakout must rise above all tops
Triple Top:
Three rising columns, with the second rising column pushing to new highs
Opposite for a Spreading Triple Bottom
Davis found that 85.7% of Spreading Triple Tops are profitable, 86.5% of Triple Bottoms

37. Figure 16.15

38. *only looked at continuation patterns*
Triangles
Very rare in Three Box Reversal Land
Only larger than normal Triangles captured
Davis found poor results: 71.4% of Bullish Triangles are profitable, 87.5% Bearish Triangles were profitable
*only looked at continuation patterns*

39. Trendlines
Drawn at 45 degree angles for multi-box reversal, subjectively for 1x1
If price can’t maintain a rise of at least the value of 1 box every time it makes a reversal, it can no longer be considered a bull trend
Bullish Support Line
Drawn from one box below the last observable column (always an O column)
Bearish Resistance Line
exact opposite
General Rules:
One should never buy unless price is greater than trendline support
One should never sell unless price is less than trendline resistance
Trendline breaks only valid if they coincide with a pattern break as well

40. Figure 16.8 in Kirkpatrick andDahlquist
See pages 180 through 183 in du Plessis

41. Rising and Declining Trendlines
In a rising trend, a trendline is drawn at a 45 degree angle from the bottom
A subsequent parallel line is drawn off of the earliest peak in that trend
Two ways for the lines to give way
A break of support – aka “Bullish Reversal Pattern”
Indicates a major turn in trend
Upward Break through bullish resistance
Indicates upward acceleration at the end of a strong move
Break of support should have more validity
Declining Trendlines seen as the exact opposite of Rising Trendlines
Break of trendline resistance aka “Bearish Reversal Pattern”

42. Figure & 16.18

43. Other Patterns Three other patterns of note: Catapult
Spike aka “Long Tail”
Shakeout
A confirming pattern
Results in a pullback or throwback following the breakout from a Triple Top or Triple Bottom
Combination of a Double and Triple Top
Powerful Pattern which allows for favourable entry
Buy 50% on a pullback, stops below the base of the formation, add on a move to new extremes

44. Figure 16.19

45. Other Patterns - continued
Spike aka “Long Tail”
A reversal in trend following a trend acceleration
How does one define a an acceleration worth of fading?
Most practitioners 17-20
(Blumenthal argued 20 boxes, Burke 17-20, Dorsey 20 boxes)
Buy on a confirmed reversal

46. Figure 16.20

47. Other Patterns - continued
Shakeout
Capitalizes on traders and investors who sell on the first sign of difficulty following an uptrend
Criteria:
Strong uptrend
A Double Bottom formed by 2 columns of O’s
A breakdown through the Double Bottom
Must occur early in a strong uptrend
Buy the reversal
Additional Rules:
The market in question must be in an uptrend
The market should be above bullish support line
The stock must form two tops at the same price
The reversal from these tops gives a Double Bottom sell signal
The sell signal is the first that has occurred
Must be showing positive relative strength or be in an uptrend

48. Figure 16.21

49. Traps
A pattern completes as expected, but then reverses and breaks out to the other side
Bull Trap
Bear Trap
See page 146 for real life examples in the FTSE

50. Chapter 6 – Point and Figure Charts of Indicators
Advantage of P&F charts on oscillators is to act as a filter
Not as useful for indicators that have been smoothed
Most useful on three types of indicators
Relative Strength which shows trend of relative outperformance
Scaling is irrelevant,
P&F allows for objective trend definition using the 45 degree trendline
Should use log scale 1% boxes
Cumulative lines like On Balance Volume
Values are arbitrary
Identifies the trend in OBV through 45 degree lines
Clarifies areas of accumulation and distribution
Use arithmetic box which is 1% of OBV range
Oscillators like RSI and Momentum
Gives cleaner signals and acts as a filter for trend determination
45 degree lines

51. Chapter 7 – Optimization
Helps with decision about box an reversal size
Ideal situation is to give you are range of values
Can tell you whether close only or H/L construction is preferable
Optimization only of value with 3 box reversal charts b/c signals are unambiguous
Percentage box sizes should be used
Optimization is not the Holy Grail
Can only offer a starting point for box and reversal sizes & pattern probabilities after that subjective analysis takes over
When employing optimization rules must be specific

52. Chapter 8 – Point and Figure Contribution to Market Breadth
Bullish Percent
Measures the percent of (equity) index components showing bullish P&F patterns, specifically Double Tops constructed from 3-box reversal price charts
Use only log scale charts of index constituents
Bullish patterns remain until they are reversed by a bearish pattern
Caveat – index components change over time, use larger indices
Performs 2 tasks
Indicates how overbought the market is
Flashes signals to accumulate or dispose stocks
Analysis:
70% means overbought, 30% means oversold, upward bias of equity markets indicates that readings are not symmetrical
50% line is the critical point, Use a 2.5% band around the 50% level
Line charts can be overlaid against price, used like other indicators
Most useful with divergences
Point and Figure has two advantages:
Double Top and Double Bottom signals apply
Last column tells you the status of the market
Column of Xs is bullish
Column of Os is bearish
More useful than line chart b/c of Filter Percentage box sizes should be used

53. Chapter 9 – Advanced P&F Technicques
Moving Averages
Calculated by taking actual or calculated center of each column
Decide on column amount, sum and divide
Main purpose is to define trend
Dual MA cross-over technique using adjacent fibo’s
Take signals with the trend, exit positions on signals against the trend
With 1 box charts, averages need to be lengthened
When using single moving averages, use a longer period MA and signals are generated when prices crosses through the average
Example: Double Top buy occurs when both Xs are above the MA
Parabolic Stop and Reverse
Created by Welles Wilder
Trend following technique with an acceleration factor
Used to identify and trade with the trend
Two types of signals: price pattern or immediately following a SAR
Use a slower acceleration factor for a 1 box chart as the congestion patterns are wider
Better than 45 degree lines in defining trailing stops in a sharp trend
Bollinger Bands
Two primary uses:
Identify overbought and oversold
Shows market volatility through band width
Bullish Indication: when price tests upper band and moving average turns to support
Bearish Indication: when price tests lower band and moving average turns to resistance
Price will cluster against the bands in a strong trend
When Bands squeeze to six month narrows, be alert for a reversion to the mean and a sharp move to transpire, count boxes between the bands to help