Charts came into existence to make the changing figures visual. Charts help us in analysis especially when the data is huge. With huge data it is very difficult to analyze the figures in a table and hence a graph or chart comes handy.
Charts also improved over time and there are so many types which are used in trading market, right from line charts to bar charts to candle stick charts.
The issue with all the charts is that they take into consideration every price move every moment. And "every moment" and "every price move" may not be really desired to be analyzed. It is because many of the moves can be just like unwanted noises and these noises need to be ignored. What need to be analyzed are the real price moves which indicate the ongoing trend.
To get a picture of the real market trends we use various technical indicators on the otherwise traditional charts. Point and Figure or P&F charts come a cut above the others and present us an opportunity to get a feel about the trends even without the technical indicators. Point and Figure charts give the real feel of the market. It is like understanding a document in a different language without the need of translation. And this happens because Point and figure charts are about the things which really matter. And what matters in trading is the real price moves and not every price move.
P & F charts take into account pre decided amount of price movement which we consider as significant and avoid other insignificant moves.
The heart and soul of point and figure charts is in the following:
1) Box Size:
Box size is the price movement in any particular market direction (up, down or range) which is worth noting. While trading Forex we may consider a 10-pips move as box size if the market is not very volatile. The box size should depend on the volatility and we can consider more pips as a box size if market is very volatile. The P&F chart would ignore any movement which is less than a box size.
2) Reversal size:
Reversal size is nothing but an indication that a reversal may be taking place. Like the box size we decide an amount (number of pips) which is reversal size. If market moves in opposite side from the ongoing direction, we ignore any movement which is less than the reversal size as an indication that market may be reversing.
The best part of it is that we can plot a P&F chart manually because we do not have to take into account every price move but just the significant ones.
With all of these we plot the
Point and Figure Charts and which gives us a very good visual feel about what is really taking place while ignoring the unwanted noises of the market. We use trend lines which are much easier to give us indications of trends and breakouts to make our trading decisions, be it
Forex, stocks or any commodities market.
