A point-and-figure chart is meant to monitor price shifts for stocks, bonds, commodities, or futures without facing any kind of restriction in regard to time. According to top 10 stock brokers in India, these charts are mainly dependent on price shifts and not time passages.
In opposite to some other popular types of charts, such as candlesticks, which measure the grade of a stock’s crusade over fixed time periods, P&F charts make the use of columns made up of weighted X's or O's, each of which denotes a fixed amount of price shift. The X's refer to increasing prices, while O's refer to a decreasing price.
The market analysts resort to concepts like support and resistance, along with other outlines, while checking P&F charts. Some claim that support and resistance stages, along with breakouts, are more precisely depicted on a P&F chart as it filters out trivial price changes and is less prone to fake breakouts.
Salient Pointers
· An X becomes applicable when the price shifts higher by a fixed amount, known as the box size. Whereas an O emerges when the price goes below the box size value.
· X's and O's sit on top of each other, correspondingly, and will sometimes develop a string of X's or O's.
· The box size is fixed on the basis of the asset's value and the investor's penchant.
· In a bid for the price to converse, leading to the creation of a new column of X's following O's or a fresh column of O's following X's, the price must converse by the setback amount.
Calculation of Point-and-Figure (P&F) Charts
While these charts need no measurement, they do need a minimum of two variables to be defined.
The first variable is the box size. The box size refers to a particular dollar value. For example, it could be $1, a %age, like 3% of the existing price, or it can be dependent on average true range (ATR) which refers to the box size will fluctuate based on volatility.
The reversal amount also needs to be defined. The reversal amount is usually 3 fold the box size. For instance, if the box size is of worth $2, the reversal amount would be of $6. The reversal value can be anything a trader decides, such as one times the box size, or 6 times the box size.
Another variable is optional and used for the fundamental asset or to practice closing prices. Using high and low prices will refer the development of more X's and O's, while utilizing only closing prices will mean lesser number of X's and O's come into action. Even if you are working on the best trading platform in India, this analysis is of extreme importance.
How traders use Point and Figure Charts during trading?
Finding Buy and Sell Signals, Pause Placement
Buy and sell signals can be both simple and complex as what traders prefer. For example, one easy buy signal can be a case when a column of X’s goes above the preceding column of X’s. The traders and investors could stay for extended period of time until a sell signal emerges. The easy sell signal is when a column of O’s goes below a preceding column of O’s.
During trading, there are mainly three things to know about the stock position - the entry, the stop, and the goal that needs to be achieved. A point and figure chart is supposed to provide information about all of them. Traders can fix their stops for longs right under the last column of O’s. Till there is no setback that halts that low, traders continue to trade.
The same is the case for shorts. Traders usually enter a short on a sell signal and place their stop overhead the preceding column of X’s. They stay in their short position until it breaks that previous high.
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Determining Profit Goals
In order to determine the target price, traders make the use of a horizontal box count. When prices shift, they typically emerge from a foundation region. Traders can determine the width of this foundation to set probability goals for the trading pattern. There is no set time frame for the target. It is to note that it is only the price movement that holds the value, and not the passage of time.
In case of a bigger reversal size, 1x3, 20x3, or so, a horizontal projection is prepared for analysis. In this scenario, traders usually multiply the horizontal box quantity with the box size and the setback size to find out the projection length.
Vertical Price Projection
Point-and-figure experts make forecasts with the original version of momentum. Below are the steps to do it:
1. Determine the base of the last X (rising) column if you have an upside getaway (or the bottom of the lowest X column if there is a chance of a comeback to the upside).
2. Count the number of boxes in the column. For example, you have four boxes.
3. Multiply the number of boxes by your setback amount, for example, take three. 4 x 3 = 12
4. Multiply that product by the box size.
Take the standard, $1.
12 $1 = $12
5. Now, add the product to the lowermost figure in the preliminary column to determine your new price target. If it was $10, you included $12 more, and now the target price would be $22.