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Home Point&Figure charts

Point & Figure charts consist of columns of X and O, which are filtered exchange rate movements for a period of time. To Forex traders, who are accustomed to using traditional bar charts, this type of schedule may seem unusual, but once they understand the meaning, these charts can become their favorite. Using Point & Figure charts have several advantages over more traditional graphical representation of exchange rate movements, because they automatically:
- elimininate minor currency fluctuations, which are often just "noise" in the bar charts;
- remove often misleading influences of the time factor of the analytical process;
- make the identification of levels of support / resistance easier;
- facilitate the identification of trend lines;
- help the Forex trader to focus on important long-term currency fluctuations.

This method has been popular for many years. This was mostly due to the fact that it was simple to be constructed and easy for maintainance of the vast collection from charts in those days when there were no computers. In less than an hour, using pencil, paper clip and graphic paper, P & F chartists could have updated and analyzed 50 or more charts per day. With the advent of the computer creating bar charts becomes very simple and P & F charts begin to lose their popularity.
Creation
On a P & F chart the exchange rate movements are depicted either as a growing column X or as a dropping column O. In order to imagine it better, we use the analogy with the standard chart analysis and believe that each column represents uptrend or downtrend. Each X or O occupies a single box, or a box on the chart. For the construction of each chart, amount or value is set for that box /box size/, which represents the change in the value of the exchange rate over the top of the current column of X /or beneath the current column of O/ prior new X /or O/ to be made to the column.
A reversal amount is also set for each chart. It determines the value of the exchange rate change in the opposite direction /down if we have a growing column of X and up for a column of O/ before a conversion to be recorded. Whenever this value has been crossed by the exchange rate, we begin a new column next to the former one and the direction is opposite. While the exchange rate increases and does not change its direction with the value reporting the reversal behavior /box size X reversal amount/, P & F chart will indicate increasing column X; or
a reversal distance = box size  X reversal amount, where reversal distance is the value reporting reversal behavior. Similarly, when the exchange rate goes down the chart will indicate decreasing column O, until the exchange rate does not change its direction with the value reporting the reversal behavior.

Traditionally, in the analysis of shares, the size of the box is 1 and the reverse value is 3.

The following values are usually used at Forex:
Box - varies from 0.0010 to 0.0025; reversal amount =3; for example, box= 0.0025, reversal distance= 0.0025 X 3= 0.0075.

The best way to understand the essence of the P & F chart is to create it by hand. All we need is graphic paper /notebook with boxes/ pencil and currency exchange rates. We will be only interested in the lowest and highest exchange rates recorded for the relevant periods and the rates of opening and closing will be ignored.
          
Let us consider the values for 4 consecutive periods of GBP/USD currency pair.
                        High            Low
           1        1.4975         1.4869
           2        1.4940         1.4838
           3        1.4985         1.4879
           4        1.4970         1.4883
          
           Key points:
1. X represent increasing rates /demand/. O represent decreasing rates /supply/. 
2. Each column consists only of X or O.
3. Reversal distance that the rate must cover in order to record conversion is equal to the box amount multiplied by reversal value.
           In our case we will examine a chart created in box=0.0025, reversal amount=3, reversal distance=0.0075 /0.0025 X 3/
           Day 1: High – 1.4975     Low – 1.4869
           On the chart we insert the highest and the lowest daily rate recorded. Because the rate goes down, we will start with a column of O.

           1.4975     O
           1.4950     O
           1.4925     O
           1.4900     O
           1.4875     O
           1.4869
           Day 2:   High – 1.4940    Low – 1.4838
In order to continue the chart we follow two things. First, we compare the lowest rate recorded for the previous and the current period. If the current low is lower than for the previous period at least with the size of the box /in our case, 0.0025 pips/ we indicate one more sign O in the same column.  Then, we check whether the recorded high for the current period is higher than the sum of the value marking the bottom of the column and the size of the reversal distance /1.4875 0.0075 /.

           1.4975     O
           1.4950     O
           1.4925     O
           1.4900     O
           1.4875     O
           1.4850     O
           1.4838
           Day 3:   High – 1.4985       Low – 1.4879
Because we are still in column O, we first check the lowest rate from the current period. The market does not record a lower low; therefore we do not add O. Then we check whether the current high is higher than the sum of the value marking the bottom of the column and the size of the reversal distance /1.4850 + 0.0075 = 1.4925/. The current high is 1.4985 and it is higher than 1.4925. This means that there is a reversal of the direction, so we add five X in new column, starting one box above the bottom of the previous column.

           1.4975     O     X
           1.4950     O     X
           1.4925     O     X
           1.4900     O     X
           1.4875     O     X
           1.4850     O
           1.4838
           Day 4:   High – 1.4970        Low- 1.4883
Now we are in a column of X, so we first check the highest rate. The market does not record a new higher high, so we turn our attention to the lowest rate.  Because the lowest rate has surpassed the difference between the value of high recorded in the current column and the reversal distance /1.4975 - 0.0075 = 1.49/ we turn the direction again and add three O in the next column.
           1.4975     O      X        
           1.4950     O      X      O
           1.4925     O      X      O
           1.4900     O      X      O
           1.4875     O      X
           1.4850     O
           1.4838

           With the course of time our chart may look like this:
                    X       X
                 X       X  O  X  O
                 X  O  X  O  X  O
  O  X       X  O  X  O  X  O  X
  O  X  O  X  O       O  X  O  X  O  X
  O  X  O  X            O       O  X  O  X  O
  O  X  O                          O   X  O  X  O
  O  X                               O        O       O
  O                     
It is important to remember that P&F charts do not show the time in linear form, i.e. each column may represent a different period of time – a day or several days depending on the exchange rate movements. Because P&F chart filters the noise, reported in more traditional graphical methods, each marking on the chart is significant.
          In the analysis using P&F chart 4 main things are primarily monitored:
           1. Levels of support.
           2. Levels of resistence.
           3. Upward trend lines.
           4. Downward trend lines.
Due to the nature of the P&F chart the levels of support and resistance are always horizontal lines and the trend lines always form an angle of 45 degrees.
  
   X       X
                 X       X  O  X  O
                 X  O  X  O  X  O
  O  X       X  O  X  O  X  O  X
  O  X  O  X  O       O  X  O  X  O  X
  O  X  O  X            O       O  X  O  X  O
  O  X  O                          O   X  O  X  O
  O  X                               O        O       O
  O                                    +    +   +   +   +   Level of support   
   
Levels of support are exchange rates, for which most players believe will resist and will resend the course up. At these levels there is enough demand to stop the downward motion and to reverse the market direction. In P&F charts, levels of support are noticed when there are horizontal lines connecting boxes with O, which in turn mark the bottom of the columns in which they are located. Similarly to the levels of support, levels of resistance are horizontal lines in the P&F chart. They usually mark the upper level or rate of trading where sellers overtake buyers. Similarly, as in identifying the levels of support, we find the levels of resistance by looking for rows of X, marking a top of the column in which they are located.
                           +   +   +    Level of resistance
   X       X
                 X       X  O  X  O
                 X  O  X  O  X  O
  O  X       X  O  X  O  X  O  X
  O  X  O  X  O       O  X  O  X  O  X
  O  X  O  X            O       O  X  O  X  O
  O  X  O                          O   X  O  X  O
  O  X                               O        O       O
  O                                   
    
           Upward trend lines
           In order to draw an upward trend line we first mark + under the first column of O.
   X       X
                 X       X  O  X  O
                 X  O  X  O  X  O
  O  X       X  O  X  O  X  O  X
  O  X  O  X  O       O  X  O  X  O  X
  O  X  O  X            O       O  X  O  X  O
  O  X  O                          O   X  O  X  O
  O  X                               O        O       O
  O
  +   
          Then following the instructions below we continue to mark + -es until we reach the column where the model is interrupted.
   X       X
                 X       X  O  X  O
                 X  O  X  O  X  O
  O  X       X  O  X  O  X  O  X
  O  X  O  X  O  +   O  X  O  X  O  X
  O  X  O  X  +        O       O  X  O  X  O
  O  X  O  +                       O  X  O  X  O
  O  X   +                           O       O      O
  O  +
  +   

           Downward trend lines
          They are drawn in a similar way as the upward ones, starting from a top point representing a barrier and have a reverse slope.
             +
   X       X  +
                 X       X  O  X  O  +
                 X  O  X  O  X  O       +
  O  X       X  O  X  O  X  O  X       +
  O  X  O  X  O       O  X  O  X  O  X   +
  O  X  O  X            O       O  X  O  X  O
  O  X  O                          O   X  O  X  O
  O  X                               O        O       O
  O
 
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