Point and Figure Charting 101: Intro

If you, the reader, have been observant, you have noticed by now that most of the time, whenever I post a stock or index chart, it looks like some odd ball cross between Chinese checkers and tic-tac toe.



“WTF is that???”, you may have wondered.

Well, thanks to a second request by Jake, I have been reminded to post information on this method of technical analysis. Hopefully, this will prove useful as another weapon you can add to your arsenal of stock market fun. The goal here isn’t to make you an expert (I don’t claim to be one myself), but to simply perk your interest and perhaps point you in the right direction where you can learn more.

Point & Figure (PnF) is somewhat of a lost art in technical analysis. With the advent of the computer age, and the ability to compute complex mathematical formulas in a nanosecond, many traders and analysts dropped this old (over 47 1/2 years) method for new fangled analyses like MACD, Stochastics, Bollinger Bands, exponential moving averages, DMI, RSI, etc., etc., etc.

However, having done this, many have lost sight of the basic principles that cause fluctuations in the prices of securities. Thousands of books, videos, and blogs have been dedicated to technical analysis, but the majority of the ones that I have seen miss the one basic and irrefutable law of the markets: supply and demand. It is this basic law of markets that PnF charting addresses, simply and eloquently. In addition, an advantage to using PnF is that you actually don’t need a computer. All you need is a newspaper that has stock prices (OHLC), a pencil, some chart paper, and the ability to draw X’s and O’s. That makes this method ideal for those over 47 1/2 years of age, especially elderly people like Warren Buffett.

One last point before we get into this: Forget about the quest for the Holy Grail of investing…



You know what I mean…that one killer formula, trading technique, or method of analyzing the market or a stock. It has to be out there somewhere, and if you could only find it, you would bank more coin than The Fly and four time machines. I have news for you. The Holy Grail doesn’t exist. Sorry.

If it does exist, it’s not what you might think it is. In my thinking, the Holy Grail represents hard work, dedication and proficiency in your craft. What drives you to it is your passion for the market and your goal of beating it handily, at will.

Having knowledge certainly helps. However, there are no substitutes for persistence and hard work. That said, don’t look at PnF charting or any other method of analysis as a Holy Grail. They’re not. They’re simply tools. You have to work at being successful in the market.

Way back in the late 1800’s Charles Dow found a way to organize and record information about the movements of stock prices. He was the first person to do this. His method of “Figuring” was the precursor to Point & Figure charting. The PnF method is simply a way to organize information about stock data.

I don’t know about you, but I suffer from information overload. There’s so much out there. Too much….kind of like trying to drink water from a fire hose (which, thankfully, I have never tried). How do you control all that massive overload of information and break it down to something you can use? That is the challenge. PnF is a logical way of organizing and recording the imbalances between supply and demand. This is what makes it so useful as a method of analysis.

When you cut through all the bullshit on the Street, CNBC, brokers, analysts, economic reports and internet resources, what you are left with is raw supply and demand data.

The PnF chart only uses the price action of a stock to measure supply and demand. Volume isn’t a consideration. Why not? Because volume has to eventually show up anyway in the chart patterns because there will be no significant price movement unless there are more buyers than sellers willing to sell or more sellers than buyers willing to buy. PnF is only interested in the net supply and demand forces. So much of the volume today is hedging and derivative related and really isn’t a true picture of a stocks supply and demand profile.

There are two letters of the alphabet that are used in this charting method: X and O. The “X’” represents demand and the “O” represents supply. The key to PnF is how the chart moves from one column to the next, from X’s to O’s then to X’s then O’s, etc. For purposes of the examples, we will use a “3 box reversal” method. You can use other points or boxes, but for my purposes, I use the 3 box method consistently. Keep it simple.

Let’s take a look at the S&P 500 chart again:



As you can see, the chart pattern is formed by alternating columns of X’s and O’s, representing demand and supply, respectively. The only way a column of X’s can change to O’s is by reversing 3 boxes. The same 3 box reversal method applies to the column of O’s. This moving back and forth from one column to the next is what forms the chart pattern. This is where the PnF chart differs from a bar chart or candlestick chart. PnF leaves volatility out of the equation and gives us a clearer picture of supply and demand. On the other hand, a bar chart includes volatility totally into consideration because the chart has to be updated every day no matter how inconsequential a price movement might be. This is what makes bar charts somewhat subjective and difficult to interpret.

Next time….”The Mechanics of Charting PnF”

Developing……