Trading with Point & Figure Charts?
Trading Point and Figure charts is not just about following signals and patterns. There is so much more to consider. This page serves as a summary. A checklist, on how to read, and trade Point and Figure charts successfully.
Point & Figure Trading Summary
Below we highlight important practices that should be followed to ensure fully informed, and successful, P&F chart trading.
- Contrary to popular belief, do not buy immediately on a Point and Figure buy signal. Wait a few days, perhaps a few weeks. Often following a breakout signal, there will be a reversion. A shallow reversal is welcome providing the original buy signal is not negated. As a result, a better level of entry is provided.
- Once a buy signal confirms, review the chart history. Check price action following prior instances of the same bullish signal. Consider the depth of subsequent pull-backs, where no sell signal was generated. As a result, a gauge of entry can be made, history has a habit of repeating. The risk-to-reward ratio on a retreat is far better than at the time of the breakout signal. Buying on a healthy pull-back is a great way to trade Point and Figure charts.
- Check volume size on reversals across major levels. For example a Low Pole or Bear Trap across support on high volume adds significance. Likewise, high volume on a High Pole or Bull Trap across major resistance will add downside conviction.
- A buy signal has greatest reliability when the price is in an established up trend. A rising trend can be determined by the use of trendlines and just by simply observing the general direction.
- Trading above the level of the 30-week moving average also provides a guide on direction. Furthermore, a buy signal at the same level of a rising average adds conviction.
- Likewise, a sell signal is most effective when the general trend is down.
- Similarly, a sell signal around the 30-week moving average should be given greater attention.
- Relative charts should always be consulted when trading Point and Figure charts. The late Mike Burke of Chartcraft considered the relative chart to be of greater importance than the price chart. Only follow buy signals on the price chart when the relative chart also has a bullish trend in place. Likewise, only consider shorting a sell signal when the relative chart exhibits a bearish trend.
- Furthermore, watch for price and relative divergences against the market. Price and relative charts may form lower highs, yet the major index, such as the S&P 500, makes a higher high. That condition is a divergence. Divergence signals the stock is tiring and should be not be owned.
- When a stock buy signal prints, its sector also needs to be showing strength. A buy signal for a stock in an underperforming sector is not likely to be strong. Therefore, always analyze the sector Point and Figure trading condition, looking for strength.
- Contrarian sentiment is a powerful tool when used in conjunction with Point and Figure signals. The ultimate market buy signal is one which occurs in the face of bad news. Likewise, the ultimate market sell signal will occur on good news.
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- Stop-losses should always be used when trading Point and Figure charts. The P&F methodology simplifies the process by nature of the boxes. When going long, positioning is typically the box beneath the preceding column of Os. Alternatively, when going short, the box above the preceding column of Xs.
- Finally, with a stop-loss determined, the trader must also know the price target. Thereby, the risk-to-reward ratio is known. If the ratio is poor, wait for a better chart to come along, they always do.