Point & Figure Price Target Explained
The Point & Figure price target is derived from mechanical price movements on the chart. Crucially, price targets are objective. Point & Figure eliminates human subjectivity by nature of its rule based methodology. Horizontal count and vertical count price targets are derived solely from price action.
Investors are more than familiar with the price targets from Wall Street fundamental analysts. Are sell-side analyst forecasts any better than targets from Point & Figure charting? A 2006 joint research paper, from Harvard Business School and Georgia State University, explored the accuracy of sell-side analyst target prices. Between 1997 and 2002, the accuracy of 100,000 analyst price targets were assessed. Authors of the paper, Mark T. Bradshaw and Lawrence D. Brown, concluded:
"target price forecasts are overly optimistic on average, and that analysts demonstrate no abilities to persistently forecast target prices"
A Point & Figure price target and stop-loss are the two variables needed to determine a trade's risk-to-reward ratio. Experienced investors never go into a trade without knowing their risk, versus their reward. Doing so, would be akin to jumping in a car, adorning a blindfold, then taking a road-trip. A stop-loss is the trade's risk and price objective, the final reward. Therefore, a favorable trade simply carries minimal risk, a tight stop-loss, coupled to a large reward, distant price objective.
P&F stop-loss positioning is straightforward. Typically, a stop-loss is placed one box beneath the preceding column of Os when going long, assuming entry is on a rising column of Xs. Conversely, in the case of a short position, the stop-loss is placed one box above the preceding column of Xs, with the assumption the trade was entered during a down O column. Depending on the P&F pattern, there will be slight variations on this rule, plus additional considerations. Stop-loss positioning, specific to a pattern, is discussed further on their respective pages.
- Bullish Patterns: Double Top, Triple Top, Quadruple Top, Bear Trap, Low Pole, Bullish Triangle and Bullish Catapult.
- Bearish Patterns: Double Bottom, Triple Bottom, Quadruple Bottom, Bull Trap, High Pole, Bearish Triangle and Bearish Catapult.
Stop-losses are of immense value to the investor, beyond the obvious reason of avoiding a ballooning loss. For instance, a 2015 research paper from the European Journal of Finance. The paper is titled "Stock market investors use of stop losses and the disposition effect".
"Stop losses used as part of investment decisions are an effective tool for inoculating against the disposition effect.""Disposition effect is an investment bias where investors hold stocks at a loss longer than stocks at a gain."
Point & Figure Price objectives are useful but not overly strict. Think of a Point & Figure price target as a chart area highlighted with a board-marker, rather than a point marked by a sharpened pencil. They provide a region to work with; a level where profit taking may be considered.
Additionally, peripheral research on the chart will enhance confidence in a P&F price target, deduced from past trading activity. For instance, harmony between a P&F price target and a resistance level increases confidence in an upside level being met. Likewise, an obvious support level clustering with a P&F price target will raise confidence in a downside target. Furthermore, trendlines and moving averages may also be considered as part of the price objective analytical process. These technical levels create areas of confluence. In turn, increasing conviction in a Point and Figure price target.
Vertical count, or a horizontal count, are the two techniques used to formulate Point & Figure price targets.
Point & Figure Vertical Count Method
Just three columns are needed to calculate a Point & Figure Vertical Count. The method may be applied following either buy signals or sell signals.
P&F Vertical Count following a Buy Signal
- Identify the column of Xs responsible for the buy signal off the bottom, the column of Os.
- Watch for the next 3 box reversal to the downside following the buy signal.
- Count the number of X boxes in the column that activated the buy signal (bullish breakout). In the illustrated example below, the buy signal is a Double Top breakout.
- Multiply the counted number of X boxes by a factor of 3. Since, in the example, we are using the 3 box reversal method.
- Multiply the result of the calculation in step (4) by the value of the box. This provides the depth of the P&F vertical count objective. In short, the up leg's distance of travel.
- Take the price objective depth from step (5). Add the depth to the lowest box stemming from the column of Xs that activated the buy signal. As a result, this final figure is the Point and Figure price target using the vertical count.
P&F Vertical Count following a Sell Signal
- Identify the column of Os responsible for the sell signal off the price peak, the preceding column of Xs.
- Watch for the next 3 box reversal to the upside following the first sell signal.
- Count the number of O filled boxes in the column that activated the sell signal (breakdown pattern).
- Multiply the counted number of O filled boxes by a factor of 2. The factor of 2 is used when the 3 box reversal method is utilized and a downside move is being calculated. A factor of 3 is not used since stock prices as a whole are rising over time. The stock market has a bias to the upside.
- Multiply the result of step (4) calculation by the value of the box. This provides the depth of the P&F price target's whole move, start to finish.
- Take the depth of the price move calculated in step (5) and deduct it from the highest box in the column of Os responsible for activating the sell signal. This final value is the downside Point and Figure price target for the sell signal.
Point & Figure Horizontal Count Method
The P&F Horizontal Count is effective following an extended period of congestion. In short, the more columns, a more powerful price objective results. At a minimum, five columns are needed to utilize this method. The method may be applied to either a breakout or breakdown.
Therefore, basing activity, accumulation across a level of support, generates an attractive upside P&F price target following a breakout. Likewise, sideways continuation patterns in a bull market are also well suited to this method.
Conversely, a horizontal count may be used to determine a breakdown target following broad top building activity. Additionally, the technique is applicable to sideways continuation patterns in a bear market, useful for short traders.
P&F Horizontal Count following a Buy Signal
- Identify a developing area of congestion, sideways activity, on the chart.
- Wait for the breakout (buy signal) to print.
- Preferred buy signals for the P&F horizontal count. Namely, Quadruple Top, Spread Triple Top or Triple Top, Bullish Triangle and Bullish Catapult.
- On the occurence of a breakout, count the number of columns across the range or base. That includes both X and O columns.
- Multiply the number of columns by a factor of 3 (since the 3 box reversal method is being used).
- Multiply the result of step (5) by the box size to provide the depth. The depth of the P&F price target is the distance of travel in box units.
- Add the depth of the price objective to the lowest box filled by the range or base (lowest column of Os). The value attained is the Point & Figure Horizontal Count price target.
P&F Horizontal Count following a Sell Signal
- Identify an area of ranging activity during a bear market or a top development following an over-extended bull market. Wait for downside confirmation via a breakdown (sell signal).
- The sell signal is ideally a broad pattern. Namely, Quadruple Bottom, Spread Triple Bottom or Triple Bottom, Bearish Triangle or Bearish Catapult. Greater width equates to a more distant P&F price target.
- Following a breakdown event, count the number of columns across the congestion area. That is, X and O columns responsible for the range.
- Multiply the number of columns by a factor of 2. Downside P&F price objectives have a lower multiplication factor, as opposed to the upside. Since, the general trend, over time, of a market is up.
- Multiply the result of step (4) by the box size. For instance, if the box value is $5 per box, then multiply by 5. The resulting value provides the depth of the downside leg, the distance of travel.
- Deduct the column depth of the price objective, as determined in step (5), from the highest box filled by the range or peak development. Finally, the outcome of that deduction is the Point and Figure Horizontal count price objective for the sell signal.
P&F Price Target Counts Across Scale Change
Additional consideration and calculation is required when determining P&F price targets across levels where the scale has adjusted. For instance, the Chartcraft log scale switches at $100, from $1 a box, to $2 a box.
Across a scale change, the Point and Figure vertical count is slightly more complex than the horizontal count. Below we explain how a P&F vertical count is tackled, with respect to scale changes. Once that technique is understood, the calculation of P&F horizontal price objectives across scale changes, should be self-explanatory.
P&F Vertical Count across change in Box Size following a Buy Signal
- Determining a P&F price target for a vertical count, across a scale change, involves two separate calculations.
- A simple calculation is performed either side of the scale change.
- The two resulting values are combined together to compute the depth of the price target, the distance of travel.
- The distance of travel is added, in the case of a buy signal, to the lowest box of the X column that was responsible for the breakout signal.
- Alternatively, in the case of a sell signal, the distance of travel would be subtracted. Deducted from the highest box responsible for the breakdown signal.
Diagram below calculates a P&F vertical count through a scale change across $100, following a Double Top breakout.
- Beneath $100 each box is $1. Above $100, boxes have a value of $2.
- The column responsible for the upside breakout has a depth of six boxes.
- Two of the boxes are beneath $100, resulting in a value of $6 (2 x $1 x 3 factor).
- Four of the boxes are above $100. Resulting in a value of $24 (4 x $2 x 3 factor). Remember, a multiplication factor of 3 is used since the chart uses the 3 box reversal method.
- Therefore, in total, the distance of travel derived from the X column responsible for the buy signal is $30.
- The distance of travel ($30) is added to the commencement of the up leg that triggered the breakout, in this case $99.
- Therefore, the P&F price target from the vertical count method, across a scale change, is $129.
Point & Figure price target calculations, both horizontal count and the vertical count, are crucial elements of success chart investing. Each method has its own merits. The vertical count is great in a fast trending market. Horizontal counts come into their element following a prolonged range-bound market. Complemented with P&F trendlines, and readily identifiable lateral levels of support and resistance, the accuracy of both methods is enhanced. Above all, their mechanical nature eliminates human subjectivity, enabling smart profit taking.
Point and Figure Price Target Case Study
August 2018 saw the SPDR Energy ETF (XLE) activate a Quadruple Bottom, a wide sell signal pattern. Consequently, to take advantage of the width, a Point & Figure horizontal count was the tool for the job. The method generated a downside target of $63. Furthermore, on the chart, note the August 2017 low reinforcing the PnF price target. Historic lows provide potential support regions.
The market fulfilled the Point and Figure price target of $63, on 10th December 2018, with a session low of $61.62. However, weakness continued, with the price sinking to a low of $53.36 on 26th December 2018. A recovery attempt followed. Trading returning to $68 in April 2019.
In this case, the P&F price target served its purpose. The trader sold the stock at $72, down to the $63 level four months later, pocketing a handsome short-sale profit.