A point and figure chart is a graphical representation of financial data in the form of stacked X's and O's. It is also referred to as a P&F chart. A number of columns, consisting of either X's or O's is used to represent daily price fluctuations without respect to the passage of time. The X's represent a rising price. The O's represent a falling price.
The aim of P&F charts is to highlight only the significant price changes; furthermore, it allows the user to identify critical support and resistance levels. Traders use this information to place orders (order their broker to either sell, buy, or modify an existing buy or sale) when a price moves outside of the identified levels.
P&F charts are created by placing X's and O's along the x axis in stacked columns. The design is similar to a bar chart with the stacks acting as bars. These charts do not represent time; only price. The chart is only modified when prices change. Some may consider this negative, however, there are a number of advantages to this characteristic of P&F charts:
- Insignificant market changes are filtered out
- Significant price changes are brought into focus
- Analysis is simplified by removing the time element
- Automatic and subjective trendlines are created
P&F charts have been in use for over 100 years. They became popular in part because of their simplicity. They were easy records to produce and maintain because they were merely sheets of graphing paper with X's and O's. They could also be quickly analyzed due to that simplicity. Patterns are easy to identify quickly, and there are many established patterns that people use to identify trends; for example, bullish breakout, bullish and bearish catapults, bullish and bearish triangles, and much more.