Basics of Point and Figure chart ::Business Line

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The point and figure chart analysis was in vogue much before computers were invented. Point and figure charts can be better understood by comparing them with bar charts.

A bar chart is a combination of both price and time scale. Horizontal axis in bar chart represents time while vertical axis denotes price. Price movement is represented by bars. Point and figure chart study only price movement. This chart is plotted using day-to-day price movements only. That is, without taking the time into consideration, for plotting.

The price movement in point and figure charts are represented by alternating columns of Xs and Os. The X is plotted in a column as long as the price keeps rising, while O is plotted representing the declining price movement in the successive column.

In a bar chart, the price action of each day is represented by one bar that is added at the right. On the other hand, only the price changes are plotted in the point and figure chart. The chart is left unchanged if there is no change in the price movement. In volatile or active market periods, the columns can get elongated.

During inactive market periods, small or no change is required in the plotting of a point and figure chart. An important disparity between bar and point and figure chart is the volume. Point and figure charts ignore volume, while in a bar chart volume is plotted below the day's price action.

Refer the charts above, a daily bar chart and a point and figure chart of Apollo Tyres approximately at the same time period are taken for illustration.

If one observes the charts closely one can identify that the non-significant price movements (noise movement) of the stock are filtered in the point and figure chart, which is an advantage for the trader as the chart helps them to easily identify the significant supports and resistances.