A forex-point-and-figure-chart-tutorial
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Point and figure charts are used by many professional forex traders. Unlike other charts, they are not based on time but only plot price movements. When the price moves a certain number of pips (the box size), an X is plotted for an increase or an O for a decrease. For a reversal, the price needs to move the box size multiplied by the number of boxes in the reversal amount. Common patterns in point and figure charts like double tops/bottoms and triangles can provide trading signals when prices break established support and resistance levels. Professional traders find point and figure charts especially useful for identifying major trend reversals in the forex market.
A forex-point-and-figure-chart-tutorial
- 2. CONTENTS 01 02 03 04 05 06 07 Disclaimer Introduction History Point and Figure Basics Using Point and Figure Charts Double and Triple Tops and Bottoms Trendlines and Triangles 08 09 Areas of Support and Resistance Point and Figure Patterns A FOREX POINT AND FIGURE CHART TUTORIAL
- 3. 01 DISCLAIMER RISK DISCLOSURE The information contained in this eBook is provided for information purposes only. The information is not intended to be and does not constitute financial advice, is general in nature and is not specific to you. Before using the information contained in this eBook to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence. None of the information contained in this eBook is intended as investment advice, as an offer or solicitation of an offer to buy or sell or as a recommendation, endorsement or sponsorship of any security. Orbex is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions. There is a substantial amount of risk in trading currencies and CFDs and the possibility exists that you can lose all, most or a portion of your capital. Orbex does not, cannot and will not assess or guarantee the suitability or profitability of any particular investment or the potential value of any investment or informational source. The securities mentioned in this eBook may not be suitable for all investors. The information provided by Orbex, including but not limited to its opinion and analysis, is based on financial models believed to be reliable but it is not guaranteed, represented or warranted to be accurate or complete. Your use of any information from this eBook or Orbex site is at your own risk and without recourse against Orbex, its owners, directors, officers, employees or content providers. A FOREX POINT AND FIGURE CHART TUTORIAL
- 4. 02 A FOREX POINT AND FIGURE CHART TUTORIAL Point and figure charts, unlike just about any other type of chart used in forex analysis, are not based on the exchange rate’s action over time but are drawn exclusively based on the exchange rate of a currency pair. Having no time scale, the point and figure chart therefore does not advance in time, but instead the exchange rate data is entered as short term and intermediate term trends change. The exclusion of volume, time and open/close data leaves only the pure exchange rate action to base technical analysis upon. With the exchange rate as the only analytical factor, point and figure charts reveal a clearer more concise picture of a currency pair’s trend, breakouts and support and resistance levels. For a number of reasons, the point and figure chart is especially suitable for analysis of the forex market, and they have become the chart of choice for many profession- al forex traders and market makers working at major banks. INTRODUCTION
- 5. A FOREX POINT AND FIGURE CHART TUTORIAL 03 HISTORY The point and figure chart has been around since the late 19th century and was first mentioned by an author named Hoyle in his 1898 book, “The Game in Wall Street”. The charting technique was later mentioned by Richard Wyckoff in his 1910 book, “Studies in Tape Reading”. In 1933, Victor Devilliers wrote the first complete book on the technique, “The Point and Figure Method of Anticipating Stock Price Movements” and later with Owen Taylor he wrote, “Devilliers and Taylor on Point and Figure Charting”. Jeremy Du Plessis, an author who has written a number of books on point and figure charting, describes the development of the charting method from a recording system. In the late nineteenth century, traders would keep track of stock prices by notating them in columns. Once they noticed patterns in their price records they began to refer to the notations as fluctuation charts and subsequently as figure charts. Instead of numbers, some traders began entering Xs and the charts became known as point charts. Traders then began using both point charts and figure charts together and started calling them their point and figure charts, which is, according to Du Plessis, the origin of the name. Today’s point and figure charts are typically plotted with Xs and Os. Columns of Xs represent rising prices, while Os in a column represent declining prices.
- 6. A FOREX POINT AND FIGURE CHART TUTORIAL 04 POINT AND FIGURE BASICS In essence, a point and figure chart can be constructed on graph paper and consists of alternating columns of boxes. These boxes have a pip value and are either labeled with an O for a decrease in the exchange rate, or an X for an increase in the rate. The box is assigned a specific pip value and labeled when the currency pair trades up or down that amount. For purposes of illustration, a 10 pip box on an exchange rate will be used. The other key element for point and figure charting is the reversal. For example, assuming the box size is ten pips and the reversal value is three. This means that in order for another column to be started, a thirty pip move in the opposite direction for the exchange rate — or three boxes - must occur for a new column entry to be made next to the previous column. For a downside reversal, three Os are entered in the box immediately under the top X in the X column. If an upside reversal has happened, three Xs are entered immediately in the box above the bottom O of the previous column to illustrate the reversal. As more transactions arise, the columns of Xs and Os begin to form patterns. In forex trading, a three point reversal with a ten pip box size would be considered optimal for most currency pairs. Any movement outside of those parameters would constitute noise and would therefore be ignored. As the exchange rate fluctuates within the three box reversal limit, the most recent column remains intact, unless the exchange rate increases another ten pips. At that point, another X is added on top of the previous one. The same is true in a falling market. The graph remains the same unless the rate drops another 10 pips, then another O is added. In either case, if the exchange rate moves up or down 30 pips then another column is started and three Xs or Os are entered.
- 7. A FOREX POINT AND FIGURE CHART TUTORIAL 05 USING POINT AND FIGURE CHARTS Signals generated by point and figure charts are typically straightforward. Using them to initiate or liquidate positions involves identifying breakout patterns in the market. Because of the numerous breakout opportunities in the forex market, this type of chart is ideal for identifying major reversals in the market. This is one of the reasons why so many professional traders use these charts. Point and figure charts accurately reflect levels of support and resistance, which can then be used by the point and figure analyst to identify tradable breakout opportunities and open positions. Trendlines can also be discerned on point and figure charts and - unlike candlestick and bar charts - they are always drawn up at a 45 degree angle and down at a 135 degree angle using either an X and the next O for a downtrend line or an O and the next X for an uptrend line.
- 8. A FOREX POINT AND FIGURE CHART TUTORIAL 06 DOUBLE AND TRIPLE TOPS AND BOTTOMS In traditional technical forex analysis, a double top generally signals the market is prepared to reverse and sell off, while a double bottom typically indicates that the exchange rate has made a significant low and will likely trade higher in future. A point and figure double top and bottom can have completely different interpretations. For example, on a point and figure chart, a double top can be seen as a reliable upside breakout indicator. If the double top is breached by just one X entry, this signals a breakout to the upside. The same is true for a double bottom, one more O entry and the breakout on the downside is confirmed. Nevertheless, if the neckline breaks instead, it would generate a bearish signal. A triple top or bottom has the same implications as a double top or bottom, but with even more certainty in the declining trend should a downside breakout occur. As a rule of thumb, the more a resistance or support level is challenged in a point and figure chart, the more meaningful the breakout once the level has been breached.
- 9. A FOREX POINT AND FIGURE CHART TUTORIAL 07 TRENDLINES AND TRIANGLES Because of the strictness in the point and figure chart entry protocol, trendlines and triangles set up much less often than with candlestick or bar charts. Also, the 45 and 135 degree angles for trendlines do not occur often, but when one forms on the upside, an opportunity for a breakout to the downside lies just below the lowest O on the downtrend column. By the same token, a breakout on the upside for a downtrend is just above the highest X in the uptrend column. The reliability of a breakout on a point and figure chart generally surpasses that of either candlestick or bar charts. Triangle formations, while not as prevalent as in candlestick and bar charts, tend to form over time in point and figure charts. These patterns generally provide excellent trading opportunities when recognized and generally the breakouts tend to be decisive when they occur.
- 10. A FOREX POINT AND FIGURE CHART TUTORIAL 08 AREAS OF SUPPORT AND RESISTANCE Tops and bottoms which remain unbroken become levels of support and resistance. Point and figure analysts look for breakouts from well defined trendlines, which are often critical points and excellent levels to establish or liquidate positions. Generally, the more concentrated in Os and Xs at the level of support or resistance, the stronger the level tends to be and consequently the more meaningful the breakout when the level is breached. While false signals may arise in point and figure charts, when long standing levels of support or resistance are breached, the breakout has a high probability of being sustained.
- 11. A FOREX POINT AND FIGURE CHART TUTORIAL 09 POINT AND FIGURE PATTERNS In addition to the previously mentioned patterns, point and figure analysts keep an eye out for a number of other bullish, bearish and neutral chart formations. A partial list of these point and figure chart patterns follows. Bullish Patterns • Triple Top - formed by three rallies to a certain level, on the third rally, the resistance is penetrated. • Ascending Triple Top - variation of the triple top, with the difference being that each consecutive top is higher than the previous one. • Upside breakout of Bullish Resistance - variation of the Ascending Triple Top, with the addition of a fourth top higher than the previous top. • Upside breakout of Bearish Resistance - a pattern of consecutive lower highs, and when resistance is penetrated, a buy signal is generated. • Spread Triple Top Breakout - variation of the triple top, except that the third rally fails and the fourth move up breaks the resistance level. Bullish Reversal Patterns • Double Bottom - two lows at the same level, and after the second low is made, the rate then breaks the neckline and a bullish signal is generated. • Triple Bottom - three lows at the same level, and after the third low is made, the rate then breaks the neckline and a bullish signal is generated. • Bullish Rectangle Reversal - downtrend shows a consolidation, and then resistance is penetrated on heavy volume to generate a bullish signal.
- 12. A FOREX POINT AND FIGURE CHART TUTORIAL 10 POINT AND FIGURE PATTERNS • Inverted Head and Shoulders - the rate forms a low in the first column followed by a consolidation, the rate then makes a second low followed by another consolidation period, the right shoulder is now formed with a buy signal generated once the rate penetrates the neckline. Bearish Patterns • Triple Bottom - formed by three down columns with the last one dropping past the line formed by the first two. • Descending Triple Bottom - a variation of the triple bottom, with the exception that each consecutive low is lower than the previous one. When the rate declines past the support level, a bearish signal is generated. • Spread Triple Bottom Breakout - another variant of the triple bottom, with the exception that the third fall fails to penetrate the support level. On the fourth fall, the rate trades lower than the support level to generate a bearish signal. • Downside Breakout of Bullish Support - a series of consecutive higher lows. When the rate penetrates the support level, a bearish signal is generated. • Downside Breakout of Bearish Support - a variation of the descending triple bottom, with the exception of an upside bias. The bearish signal is generated once the support level is breached. Bearish Reversal Patterns • Head and Shoulders - the rate makes a high in the first column, followed by a second high with a period of consolidation. The right shoulder then develops followed by a selloff with high volume on the last move downward, which penetrates the support level and generates a bearish signal.
- 13. A FOREX POINT AND FIGURE CHART TUTORIAL 11 POINT AND FIGURE PATTERNS • Double Top - consists of two highs at the same level, with the second high penetrating the neckline and generating a bullish signal. • Triple Top – consists of three highs at the same level, after the third high is made, a bearish column breaks the neckline thereby generating a bearish signal. • Bearish Rectangle Reversal - after a period of consolidation, the support level is breached, thereby generating a bearish signal. Trend Reversal Patterns • Double Top - two highs at the same level, and after the second high is made, the rate breaks the neckline on the downside thereby generating a bearish signal. • Double Bottom - two lows at the same level, and after the second low is made, the rate breaks the neckline on the upside to generate a bullish signal. • Head and Shoulders - the rate makes a high in the first column followed by a consolidation period. A second high is formed followed by another consolidation; subsequently, the right shoulder is formed followed by a selloff below the consolidation level that generates a bearish signal. • Inverted Head and Shoulders - the rate makes a low in the first column followed by a consolidation period. A second low is formed followed by another consolidation; subsequently, the right shoulder is formed followed by a rally above the consolidation level to generate a bullish signal. • Bullish Rectangle Reversal - a period of consolidation after a selloff forms a rectangle, and when the topside resistance is penetrated, a bullish signal is generated.
- 14. A FOREX POINT AND FIGURE CHART TUTORIAL 12 POINT AND FIGURE PATTERNS • Bearish Rectangle Reversal - a period of consolidation after a rally forms a rectangle, and when the lower end support is penetrated, a bearish signal is generated. Neutral Patterns • Flag - initially, a large gain is followed by a consolidation period, then another bullish column forms, breaking the 45 degree resistance level and generating a bullish signal. • Inverted Flag - a large decline is followed by a consolidation period, then another bearish column forms to breach the support level and generate a bearish signal. • Pennant - a variation on the Flag, this formation has the same rules as the Flag with the difference being that the formation after the sharp move is triangular in shape. • Inverted Pennant - Follows the inverted Flag rules with a triangular consolidation after the sharp move.
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