How Do Point and Figure Charts Work in Financial Analysis?

Technical analysis relies on various charting methods to identify trends and price movements, and point and figure (P&F) charts offer a unique way to filter out market noise. Unlike candlestick or bar charts, P&F charts focus solely on significant price changes, ignoring time-based fluctuations. This makes them useful for spotting long-term trends and key support and resistance levels.

By eliminating minor price movements, these charts help traders focus on supply and demand dynamics. Understanding their construction and interpretation provides valuable insights into market behavior.

Building the Chart

Point and figure charts track price movements using Xs and Os to represent rising and falling prices. Unlike conventional charts, they do not incorporate time, allowing traders to concentrate on meaningful price shifts rather than short-term volatility. Their construction depends on three key elements: the arrangement of Xs and Os, the chosen box size, and the reversal rules that determine direction changes.

Columns of Xs and Os

Each column consists of either Xs or Os, where Xs indicate rising prices and Os represent falling prices. A new X is added when the price moves up by at least the predefined box amount, while an O is added when the price falls by that same amount. If the price fluctuates within a range smaller than the box size, no changes occur, filtering out insignificant movements. A new column forms only when a price reversal meets the established criteria, ensuring only meaningful shifts in supply and demand are recorded. This structure helps traders identify sustained trends without distractions.

Box Specifications

The box size determines how much an asset must move before a new X or O is added. Traders can set this amount using fixed values, such as $1 per box, or percentage-based increments. Larger box sizes smooth out minor fluctuations, making the chart more useful for identifying long-term trends, while smaller box sizes provide greater detail on short-term movements. Some traders use the Average True Range (ATR) to set a dynamic box size that adjusts to market volatility. Choosing the right box size influences how sensitive the chart is to price changes, affecting trend recognition and trading decisions.

Reversal Rules

For a new column to form, the price must move in the opposite direction by a set multiple of the box size, typically three times the box amount. This reversal amount prevents minor retracements from cluttering the chart. For example, if the box size is $2 and the reversal amount is three boxes, the price must move at least $6 in the opposite direction before a new column is created. Some traders adjust the reversal amount based on their strategy, with smaller reversals capturing more frequent shifts and larger reversals emphasizing major trends.

Recognizing Common Patterns

Point and figure charts help traders identify recurring formations that signal potential price movements. These patterns provide insight into market sentiment and can indicate whether an asset is likely to continue its trend or reverse direction.

Triple Top Breakout

A triple top breakout occurs when an asset’s price reaches the same level three times, forming a horizontal resistance line. If the price surpasses this level on the third attempt, it signals strong buying pressure and a potential upward trend. On a point and figure chart, this pattern appears as three columns of Xs reaching the same price level, followed by a fourth column that moves higher. Traders often interpret this as a bullish signal, suggesting demand has overcome supply. To confirm the breakout, some look for additional volume or other technical indicators, such as moving averages. A common strategy is to set a price target by measuring the height of the pattern and projecting it upward from the breakout point.

Double Bottom Breakdown

A double bottom breakdown signals a bearish trend. This pattern forms when an asset’s price declines to a certain level twice, creating a horizontal support line. If the price falls below this level on the second attempt, it suggests selling pressure has intensified. On a point and figure chart, this appears as two columns of Os reaching the same price level, followed by a third column that moves lower. Traders view this as a sign that supply is overwhelming demand, potentially leading to further declines. To estimate a price target, some measure the height of the pattern and subtract it from the breakdown point.

Bullish and Bearish Catapults

Bullish and bearish catapults are continuation patterns that indicate a strengthening trend. A bullish catapult occurs when a triple top breakout is followed by a brief pullback and then another breakout, suggesting buyers remain in control. On a point and figure chart, this pattern appears as a breakout column of Xs, a short column of Os, and then another column of Xs moving higher.

A bearish catapult follows a similar structure but in the opposite direction. It begins with a double bottom breakdown, followed by a short upward retracement, and then another decline. This pattern indicates sellers are maintaining control and that the downtrend is likely to continue. On a point and figure chart, it appears as a breakdown column of Os, a short column of Xs, and then another column of Os moving lower.

Marking Support and Resistance

Support and resistance levels play a major role in point and figure chart analysis, offering traders insights into price barriers that influence buying and selling behavior. These levels form based on historical price reactions, where assets repeatedly struggle to move beyond a certain point. Unlike time-based charts, which can be cluttered with short-term fluctuations, point and figure charts provide a clearer view of these levels by emphasizing sustained price movements.

Support levels emerge when an asset’s price consistently stops declining at a specific point, indicating strong buying interest. This suggests demand is sufficient to absorb selling pressure, preventing further declines. Traders monitor these areas closely, as a failure to break below support can signal a potential rebound. When prices approach support, some initiate long positions, expecting an upward movement, while others use it as a reference for setting stop-loss orders.

Resistance levels develop when prices repeatedly struggle to rise beyond a certain point, indicating strong selling pressure. If a stock or commodity approaches resistance and fails to break through, traders may interpret this as a signal to sell or take profits. However, if resistance is breached, it can lead to significant price increases as traders rush to enter new positions. This phenomenon, known as a breakout, often results in the previous resistance level becoming a new support level, a concept referred to as role reversal.

Setting Price Objectives

Determining price objectives in point and figure charting involves projecting potential future price movements using methods that quantify trend strength and momentum. One widely used approach is the vertical count method, which estimates upside or downside targets based on the number of boxes in a completed pattern. This technique begins by measuring the height of a column representing a breakout or breakdown, then multiplying it by a predetermined factor—often the box size and reversal amount—to establish an estimated price target. For example, if a breakout column consists of 10 Xs with a box size of $2 and a reversal of three, the projected move would be 10 × 2 × 3, or $60 added to the breakout level.

Another approach is the horizontal count method, which evaluates price targets by analyzing the width of a congestion area before a breakout occurs. This method assumes that a prolonged period of consolidation often leads to a significant price movement. The width of the base is counted in boxes, then multiplied by the box size and a specific projection factor, typically derived from historical trends. Traders use this method when an asset trades within a well-defined range for an extended period before breaking out, as a wider base often leads to a stronger price objective.