Point and figure is a charting technique used in technical analysis, used to attempt to predict financial market prices. Point and figure charting is unique in that it does not plot price against time as all other techniques do. Instead it plots price against changes in direction by plotting a column of Xs as the price rises and a column of Os as the price falls.
How to Draw
The correct way to draw a point and figure chart is to plot every price change but practicality has rendered this difficult to do for a large quantity of stocks so many point and figure chartists use the summary prices at the end of each day. The charts are constructed by deciding on the value represented by each X and O. Any price change below this value is ignored so point and figure acts as a filter to filter out the smaller price changes. The charts change column when the price changes direction by the value of a certain number of Xs or Os. Traditionally this was one and is called a 1 box reversal chart. More common is three called a 3 box reversal chart. In the image Nifty showing the point and figure chart for the 2009 & 2010.
45 Degree Trend lines
Because point and figure charts are plotted on squared paper, 45 degree lines may be used to define up trends and down trends from important highs and lows on the chart allowing objective analysis of trends. In the image Nifty showing the 45 degree trend line from Nifty's early March 2009 bottom.
Also in common usage are two methods of obtaining price targets from point and figure charts. The vertical method measures the length of the thrust off a high or low and projects the thrust to obtain a target. The horizontal method measures the width of a congestion pattern and uses that to obtain a target.
Point and Figure Patterns