Point & Figure is considered to be one of the oldest charting methods. It considers only price hence it is known as one-dimensional charting method. It is an interesting method of representing price. It is the only method where we plot price in columns, and they move vertically when the price moves.
In this method, because price is not plotted based on time, we need to define the criteria to plot the price. This is known as box-value or the size of every box.
When the price goes up, it is plotted in the column of X. When the price falls, it is plotted in the column of O. Price remains in the column of ‘X’ or ‘O’ unless the reversal criteria is met. Hence, a column of ‘X’ or ‘O’ can represent the price action of several sessions. Usually, criteria of three box is used for plotting the reversal.
Below is a 3% box-value chart of Nifty.
Value of each box is 3% in the above chart. It helps us in looking at a bigger picture. By choosing a higher box-value of 3%, we can take a look at the price information of more than 13 years on a ‘daily’ timeframe in the above chart. The 45-degree objective trend lines are one of the important properties of P&F charts. Trendlines are plotted in the above chart from the major high of 2008 and the major low recorded in 2009.
The bullish trend line drawn from bottom after consolidation during Feb 2009 was recently tested by the price and is still intact. Observe the duration of the consolidation highlighted in the circle. It can capture the price action of a few months to few years. The recent price consolidation was less than 2-months timewise, but significant in terms of price volatility.
The vertical counts shown in the chart are plotted from the immediate column of ‘X’ formed after the bottom. In the past few instances, the price got into a consolidation phase after achieving the targets. After the consolidation phase, the price has proceeded higher and has activated more higher counts. Current trend is bullish and strong, vertical counts plotted from the recent bottom has been achieved.
Let us reduce the box-value that captures the short-term and medium-term price action.
Bullish green trend lines shown in the above chart are 45-degree trend lines plotted from important bottoms. Red lines are bearish trend lines plotted in the uptrend and the breakout above such lines are continuation-trading opportunities.
The short-term bullish count that got activated recently has almost been achieved. The count of 14,000+ is open but I would prefer to wait for more confirmation for validation of the second vertical count. The XO zone indicator, displayed in the lower pane in the above chart, is also is suggesting that the trend is bullish.
Notice the recent column consolidation in the short-term chart. This is an interesting discussion.
If we divide the price pattern based on the recent swing moves, below are the possibilities:
From the above schematic, it is apparent that the last four price swings in any chart can help us identify the four broad price patterns captured above.
This kind of pattern identification and classification can be easily defined and achieved in P&F charts. Recall how each column of X or O represents a swing move. Let us understand how the above patterns will manifest in the P&F chart. Have a look the chart below.
The swing patterns can be easily made objective in P&F chart. Now that we have successfully identified the swing pattern into 5 broad categories, we can assign scores to them as well.
It can help us in performing multi-timeframe analysis on any stock. Higher box-value chart will capture the price action or the swing pattern on the higher time frame while the smaller box-value will capture the short-term structure.
Below are the current patterns on Nifty on multiple box-values.
Pattern of consolidation on short-term (0.10%) and medium-term (0.25%) charts and bullish breakout on higher timeframe (1% and 3%) chart. This study across multiple box size is called as P&F Matrix.
Let us explore more possibilities with this swing identification of last four swings. We can count number of boxes in the above patterns. The total number of the boxes in a column tells us about the length of the pattern. If the length of a column is big, it indicates strong momentum in price. If it is too narrow it is more of a consolidation. So, by calculating the number of boxes in the pattern, we can come to know about the range or volatility of the pattern.
As mentioned earlier, the column of ‘X’ in P&F chart captures rising price or bullish prints and ‘O’ captures falling price or bearish prints. If number of bullish prints are more than bearish prints the trend is bullish and strong. If bearish prints are more the trend, then is bearish.
So, we now have three aspects based on the swing pattern: Nature of the pattern, Volatility and Trend.
Trend / Volatility = Trend Ratio of the pattern
With this knowledge, there are many possibilities of defining the market phase. For instance, a high range score and a high trend ratio indicates strong momentum. During such a phase, trading the stocks with high range and momentum proves beneficial. Low range and high trend ratio show us pattern of consolidation where undertone indicates possible breakout direction. Determining market phase can help us in deciding the appropriate trading strategy.
In the Nifty 50, 3% box size chart, there are 18 ‘O’s and 20 ‘X’s (Refer image) in the last four columns. So, the total range score is 38 boxes while the net strength out of these 38-boxes is 2 (20-box of X minus 18 box of O). The Trend ratio is about 5%. In the short-term charts too, there is a pattern of consolidation with a trend ratio of less than 10%.
The above concept is applicable on stocks as well to filter the universe. Chart analysis can help in filtering the candidates. Analysis tells us about the probability, while the objective patterns can help in managing the trade.
Below is a chart of Nifty v/s major asset classes. Nifty is currently outperforming all other markets.
The picture was same even during recent bearish trend in Nifty. For a strong reversal, this picture needs to change.
P&F charts are unique but lesser explored. Using its properties, we can read the hidden price patterns. It can complement any form of analysis or method of trading.