Categories

## Point & Figure: Profit Target and Stop-loss Settings Made Simple

Something new traders struggle with is trying to find appropriate profit targets and stop targets. Point & Figure charts make a process that is a struggle into something that is very, very easy. Two methods can be used to identify profit targets on a Point & Figure chart: Vertical Method and Horizontal Method. I am only going to show you the Vertical Method because the entire series I’ve done here has strictly been on the use of 3-box reversal Point & Figure charts.

The Horizontal Method can be found in Jeremy Du Plessis’s work. The Horizontal Method is more applicable to the most traditional form of Point & Figure – the 1-box reversal chart. There’s a formula for calculating the profit target on Point & Figure. Don’t get freaked about the word formula – the process is very simple.

Buy/Long Profit Target = (number of Xs in prior column * box size) * (reversal amount) + lowest O of the current O column.

Short Profit Target = (Number of Os in prior column * box size) * (reversal amount) – highest X of the current X column.

Stops

Regarding stops, I always stick with the reversal amount – so my risk is always, no matter the trade, 3-boxes worth. On my standard 20-pip box size Point & Figure charts, 60 pips are my max loss on any trade. Some authors suggest putting the stop one box below (or above) the reversal amount, but I’ve always stuck with the reversal amount being my stop.

I want to tell you something that might be a little mind-boggling. I’ve been teaching Point & Figure to another class this year, and we’ve focused on live testing the ‘blind entry’ trading strategy in Point & Figure – which is nothing more than taking every single multiple-top or multiple-bottom break without any other filter. We focused on the following pairs:

GBPUSD, AUDUSD, USDCAD, USDJPY, GBPJPY, EURGBP, EURUSD, and AUDJPY.

We did not use any profit targets. We exited trades only when the reversal column appeared. So our losses were always limited to just 60 pips on a 20-pip/3-box reversal Point & Figure chart. We traded from March 1st, 2019 through December 7th, 2019. The results below detail the net pips at the end of our trading period:

GBPUSD = +1,060 pips

AUDUSD = -60 pips

UDSJPY = +1060 pips

GBPJPY = + 2,620 pips

EURGBP = +480 pips

EURUSD = -280 pips

AUDJPY = +1,200 pips

Net Total pips = +6,280 (the average for the class was +5443 pips).

To put that into perspective, with a 0.1 (10,000 unit) Lot size, that’s a net \$6,280.00. A full Lot would have equaled a net \$62,800. I had one woman who traded an odd 3.33 Lots as her standard position size (I guess it is not that odd if you think about it). She led the pack with her real net pip count at +6,880 – with a 3.33 lot size that meant she made a net \$229,104. I was and remain very envious of her performance – she should probably be teaching!

Sources:

Dorsey, T. J. (2013). Point and figure charting: the essential application for forecasting and tracking market prices (4th ed.). Hoboken, NJ: John Wiley & Sons.

Kirkpatrick II, C. D., & Dahlquist, J.R. (2016). Technical Analysis: The Complete Resource for Financial Market Technicians (Third). Old Tappan, NJ: Pearson.

Plessis, J.J. (2012). Definitive Guide to Point and Figure – a comprehensive guide to the theory (2nd ed.). Great Britain: Harriman House Publishing.

DeVilliers, V., & Taylor, O. (2008). Point and figure charting. London: Financial Times/Prentice Hall.

Categories

## Point & Figure: Applied Trading Strategies and Theory

Of all the chart styles and trading styles I’ve used in my years of trading, Point & Figure is by far the least stressful and most profitable I’ve ever used. Point & Figure, for a trader, I believe, is the most stress-free form of charting available.

There is no need for economic reports or balance sheets. Point & Figure is concise, logical, and it eliminates guesswork and emotion. It is the most scientific and fact-based chart form. From an analysis perspective, I believe chart forms that include time, volume, and price are superior to Point & Figure (Japanese Candlesticks and American Bar Charts). From a trading perspective, Point & Figure is superior to all. I believe this because trading is an emotional career, and the more we can filter out the stimuli that cause emotional reactions, the better traders we become.

This section will review common patterns and strategies for Point & Figure charts. These are limited to 3-box reversal charts. I have debated whether to write about 1-box and 2-box reversal charts, but I have decided against it. The reason is that I do not use them, I stick with 3-box reversal charts only for Forex markets.

The following are chart patterns, as described in the books I’ve identified as sources at the end of these articles. Many of these patterns I’m going to show are from Dahlquist and Kirkpatrick’s phenomenal book, Technical Analysis – The Complete Resource for Financial Market Technicians (3rd Edition). If you want to get an understanding of how vital and powerful Point & Figure is, compare the size of the Point & Figure chapter against all the other sections in that book (consequently, that book is part of the required reading for the CMT certification.

I have ping-ponged the idea of skipping some of the patterns in Dahlquist’s and Kirkpatrick’s book because some of the patterns were determined to be ineffective in their cited research. The sources Kirkpatrick and Dahlquist’s reference showed pattern results in equity markets. Equity markets and Forex markets are not the same, so while some of the patterns described in Technical Analysis indicate they should be ignored, I am going to include them because they may work better in Forex markets. You will find this a constant throughout technical analysis literature: the positive expectancies of patterns, strategies, and theories have almost exclusively been tested in equity markets.

### Trap Patterns

I am starting off our study with a pattern that you will frequently encounter. Trying to avoid them is near impossible, but because losses are extremely limited in Point & Figure, even successive traps generate minimal losses compared to gains. But I believe it is imperative to understand that traps do occur, they can be frequent, and you will have to get used to them. There are two types of traps, bull traps, and bear traps. Traps occur when a breakout from a multiple top or bottom creates an entry, but price changes direction, and the next column generates a trade entry on the opposite side of the trade.

Bull Trap: Bull traps occur when price breaks a multiple top and creates a buy entry, but then the X column reverses to an O column that creates a new short entry.

Bear Trap: Bear traps occur when price breaks a multiple bottom and creates a short entry, but then the O column reverses to an X column that creates a new buy entry.

### Rising Bottoms

A rising bottom pattern may look like a regular double top pattern, but it is different. It is different because of the columns of Os in this pattern. The Rising Bottoms pattern has at least four columns with sequential higher lows. The last O column must have a higher low than the first column of Os, and the previous X column must have a higher low than the first X column. The long entry occurs when the double top is broken.

### Declining Tops

The Declining Tops pattern is the inverse of the Rising Bottoms pattern. The Declining Tops pattern has at least four columns with sequential lower highs. The last X column must have a lower high than the first column of Xs, and the previous O column must have a lower high than the first O column. The short entry occurs when the double bottom is broken.

### Split Tops and Bottoms

Split Tops and Bottoms generally occur in the form of Split Triple Tops and Split Triple Bottoms. Split Tops and Bottoms have a ‘gap’ in between the tops and bottoms. How many columns do you consider in the formation of a Split Top or Bottom? It is generally believed that 6 to 10 columns are appropriate for finding Split Tops and Bottoms. We trade Split Tops and Bottoms patterns the same way we trade any other multiple top or bottom.

### Triangles

Triangles are common patterns you will find on Point & Figure charts. But it is important to remember that just because price breaks through a triangle, that doesn’t mean that we take an immediate entry on the break – we still have to wait for a multiple top or bottom to be broken.

### Catapults

Catapults can be a somewhat confusing pattern, but they are compelling. The Catapult Pattern was one of the few patterns in Technical Analysis that generate equally positive returns on the short side of equity markets as it did on the long side. The strength of these patterns is related to the psychological component of trading. Catapults generally show up after a trendline break or after multiple top or bottom (at least a triple top/bottom or a split triple top/bottom). Catapults are most often pullback/throwback trades, and that is why they are so powerful.

### Spike Patterns

Spike Patterns (along with Pole Patterns) are the only patterns that have a small amount of subjectivity and interpretation. Even Dalquist and Kirkpatrick could not identify consensus from other Point & Figure experts on what constitutes a Spike Pattern. A spike pattern is a massive column that is around 15 to 20 boxes in length. This is my absolute favorite pattern because it has such an enormous reward and minimal risk. This is also only one of two patterns (the other being the Pole Pattern), where the entry does not require a multiple top or bottom. Spike patterns are entered immediately on the reversal column.

### Pole Patterns

Pole patterns are hands down the most subjective pattern in Point & Figure. The problems with identifying with what qualifies as a Pole comes down to broad interpretation. A Pole is very much like a Spike Pattern in that it’s a substantial column, but it is smaller than a Spike. Poles are any column that is less than sixteen boxes but also more significant than ‘normal’ size columns. One of the identifying factors of a Pole Pattern is the same as a Spike Pattern: they show up at the end of swings. Trading a Pole Pattern is relatively simple. All we do is measure the length of the Pole with a Fibonacci retracement tool (doesn’t matter where you start) and then enter long or short when price moves beyond the 50% level.

Sources:

Dorsey, T. J. (2013). Point and figure charting: the essential application for forecasting and tracking market prices (4th ed.). Hoboken, NJ: John Wiley & Sons.

Kirkpatrick II, C. D., & Dahlquist, J.R. (2016). Technical Analysis: The Complete Resource for Financial Market Technicians (Third). Old Tappan, NJ: Pearson.

Plessis, J.J. (2012). Definitive Guide to Point and Figure – a comprehensive guide to the theory (2nd ed.). Great Britain: Harriman House Publishing.

DeVilliers, V., & Taylor, O. (2008). Point and figure charting. London: Financial Times/Prentice Hall.

Categories

## Point & Figure Charts: Introduction

### Point & Figure Charts

If the only chart style you have ever been familiar with is Japanese candlesticks or American bar charts, then no doubt Point & Figure charts will look very foreign. They have the appearance of random and new while also being very organized and very old looking. Point and Figure charts are the earliest known forms of technical charting that we know of, and many civilizations have generated some Point and Figure charts out necessity. Another concept that may be difficult to grasp if you are new to price action only chart styles is that Point and Figure charts are an intraday charting style, but is void of any time component. Live data is necessary when using Point and Figure charts. The fact that Point and Figure is an intraday chart style will confound most people who are familiar with charts that utilize the component of time, like Japanese candlesticks. Most of you who are learning about Point and Figure charts will assume that Point and Figure is a long term chart form. It is tough to create the mindset that time is not a factor in Point and Figure. But let’s get to the chart.

Point & Figure Chart Basics – Box Size and Reversal Amount

Point & Figure charts are represented by a Box Size and a Reversal Amount. Boxes are represented as Xs and Os. The trader or analyst determines the Box Size. Depending on the market you are trading and the Reversal Amount, the Box Size will vary from one market and instrument to the next. I will provide a table with the box sizes I use in my trading at the end of this article. On a Point & Figure chart, Xs and Os represent price direction. Xs, often colored green, represent price moving up. Os, usually colored red, represent price moving down.

The trader or analyst also defines the Reversal Amount. Historically, Point & Figure charts were 1-box Reversal charts. Today, 3-box reversal charts are the most common. There is no limit on the number of boxes required for a reversal. I only use 3-box reversal charts – they perform exceptionally well in Forex markets. The Reversal Amount dictates how many boxes price needs to move to print a new column of Xs or Os. Let’s look at the Box Size and Reversal Amount on the chart below.

Box Size & Reversal Amount

 Pair Box Size (in pips) Pair Box Size (in pips) AUDCAD 20 GBPAUD 40 AUDCHF 20 GBPCAD 40 AUDJPY 20 GBPCHF 20 AUDUSD 10 GBPJPY 20 CADJPY 20 GBPNZD 40 CHFJPY 20 GBPUSD 20 EURAUD 40 NZDCAD 20 EURCAD 20 NZDJPY 20 EURCHF 20 NZDUSD 20 EURGBP 20 USDCAD 20 EURJPY 20 USDJPY 20 EURNZD 40 USDCHF 20 EURUSD 20

How much time does it take for a column to change from X to O?

Your transition to a price action only chart from a Japanese candlestick chart is going to continually be hampered by continuing to think that ‘time’ has someplace on a Point & Figure chart. You will look at a chart and say to yourself, ‘Well, that column of Xs has been there for a while, it can’t move anymore, it will probably reverse.’ While the concept of time is not used, some pieces of software will allow you to imprint the month on the chart where the month’s number will appear at the price level it was trading at when the month started. This can give those who are transitioning to Point & Figure as a new chart style some ‘grasp’ of time. See below.

Some traders may find having the month displayed as a benefit. Is it useful? I think so. It does at least give a sort of perspective of time and how long something has remained in a single column or how many reversals have been printed on the screen. Additionally, cycle analysis teaches that we often see some of the highest probabilities of trend changes or corrective moves occurring at the start of a new month. If we observe a new month starting near an extreme high or low, we could be looking at an imminent reversal with at least a high probability short term trade option.

Trend Lines and Patterns

Another concept that people new to a price action only chart style might find difficult to understand is that P&F charts are always in a bear or bull market. And depending on the time frames you trade on a Japanese candlestick chart, Point & Figure charts may change bull and bear trends frequently or infrequently. Two types of trendlines can be drawn on a Point & Figure chart:

1. Objective (requires only one point to draw).
2. Subjective (requires two or more to draw).

Objective Trend Lines or Dominant Angles are also called 45-degree angles. Dominant angles only require one point to be drawn, and they are always drawn from O to X or X to O (in 3-box reversal charts) – and always to the column right next to eachother. The software I am using for these articles is called Optuma by Market Analyst. In Optuma’s software, they auto-draw some of the dominant trend lines. Subjective trendlines are drawn the same way you would draw any other trendline on a Japanese candlestick chart. I rarely, if ever, utilize subjective trendlines. In some of the strategies I will go over, the dominant/45-degree trendlines are useful in determining the direction of the trading you should take.

Patterns such as flags and pennants will show up on Point & Figure charts just like you would see on Japanese candlestick charts. The same principles that we would apply in trading continuation patterns like flags and pennants are the same on a Point & Figure chart. There are some stark differences between the breakouts of a pattern on a candlestick chart versus a Point & Figure chart. There is a primary difference between how we treat breakouts of patterns and trendlines on a Point & Figure chart versus a candlestick chart.

Most Important Rule To Follow

There is one primary rule that must be followed when trading on Point & Figure charts.

Only Enter Trades After Multipletops/Multiplebottoms have been broken.

I’ve said that Point & Figure charts are unambiguous. The entry rules in Point & Figure reinforces that statement. When a multiple top appears, the entry is always on the next X above the multiple top. When multiple bottoms appear, the entry is always on the next O below the multiple bottom. See the charts below:

A question often arises when an X or O breaks a trendline: do you enter a trade when the trendline is broken? It depends. The entry rules of multiple tops and multiple bottoms still apply. Even if the price breaks a trendline, a multiple top or bottom needs to be broken to take an entry. Further discussion into entry rules and entry strategies will be discussed in further articles.

Sources:

Dorsey, T. J. (2013). Point and figure charting: the essential application for forecasting and tracking market prices (4th ed.). Hoboken, NJ: John Wiley & Sons.

Kirkpatrick II, C. D., & Dahlquist, J.R. (2016). Technical Analysis: The Complete Resource for Financial Market Technicians (Third). Old Tappan, NJ: Pearson.

Plessis, J.J. (2012). Definitive Guide to Point and Figure – a comprehensive guide to the theory (2nd ed.). Great Britain: Harriman House Publishing.

DeVilliers, V., & Taylor, O. (2008). Point and figure charting. London: Financial Times/Prentice Hall.

Categories

## Point & Figure Introduction: The Problem with Japanese Candlesticks

### Problems with Japanese Candlestick Analysis

One of the big buzz words or methodologies used in trading over the past ten years has been the term and/or style called ‘Price Action Trading.’ It is also known as ‘Naked Trading’ or, much less known as ‘Dynamic Impulse Trading.’ Price Action Trading is a style and methodology that teaches students to utilize candlesticks charts with no lagging indicators or oscillators. Students learn to utilize very little in the form of any tools beyond trend lines, subjective horizontal support/resistance, and pattern recognition. Not surprisingly, many people fail at Price Action Trading. I would venture that out of all the methodologies taught to new traders and analysts, Price Action Trading with Japanese candlesticks causes more new trader accounts to go bust than almost any other trading style or system.

The problem with Price Action Trading using Japanese candlesticks gets exacerbated the faster the time frame used. Japanese candlesticks are, believe it or not, a very advanced form of analysis that requires a significant amount of study to interpret and apply today’s financial markets properly. Traditionally, the application of Japanese candlesticks did not occur on fast time frames. Instead, they were limited to longer time frames such as weekly and monthly charts, and those are timeframes where the analysis, interpretation, and execution of Japanese candlesticks have very few equals. To make Japanese candlesticks work on fast time frames in modern markets requires the use of a myriad of supporting tools such as oscillators and indicators. The use of oscillators and indicators with Japanese candlesticks is necessary is because Japanese candlesticks are three-dimensional: price, time, and volume. Point & Figure only records price.

### Point & Figure Analysis

For the Price Action Trader, no chart style is purer than Point & Figure because Point & Figure records only price. In Point & Figure Analysis, time is not measured or used, and volume is anecdotal. That may seem anathema to many traders, but it makes perfect sense from the perspective of a Point & Figure user. Because Point & Figure only records price moves, it makes sense why volume is anecdotal and not significant. If you think about it, the volume itself isn’t relevant unless there is a corresponding price move. Price is the only thing that matters. One of the greatest authorities and written works of Technical Analysis is de Villiers and Taylor’s Point and Figure Charting. They make a compelling case for the weight and authority of this chart and analysis style.

• Point & Figure is logical in its application.
• Simple and easy to master.
• Point & Figure is void of mystery, guessing, and complications caused by subjective analysis.
• News, economic reports, and other sources of market noise are not necessary.
• Losses are limited while profits accrue – easy stop and profit target calculations.
• Point & Figure signals are clear and unambiguous.
• The method avoids and dismisses manipulation.
• Inside information not necessary.
• Volume manipulations are pointless and irrelevant.
• Insignificant price moves are ignored.
• Support and resistance easy to identify.

Sources:

Dorsey, T. J. (2013). Point and figure charting: the essential application for forecasting and tracking market prices (4th ed.). Hoboken, NJ: John Wiley & Sons.

Kirkpatrick II, C. D., & Dahlquist, J.R. (2016). Technical Analysis: The Complete Resource for Financial Market Technicians (Third). Old Tappan, NJ: Pearson.

Plessis, J.J. (2012). Definitive Guide to Point and Figure – a comprehensive guide to the theory (2nd ed.). Great Britain: Harriman House Publishing.

DeVilliers, V., & Taylor, O. (2008). Point and figure charting. London: Financial Times/Prentice Hall.