Technical analysis I

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10. Point and figure charts

A point and figure chart has price on the Y-axis and time on the X-axis, but the time function is not regular because prices are only plotted on the chart when they represent significant movements.

To plot a point and figure chart, therefore, you first need to decide what is significant. In the example below, we have decided that a 5p change in either direction is significant.

• Every time the price rises by 5p or more a cross is drawn on the chart above the previous one.
• If the price moves by less than 5p, nothing is drawn on the chart.
• If the price falls by more than 5p then the column of crosses stops and a new column is created immediately to the right of the first, this time with noughts. This is known as a reversal.
• Now every time the price drops by 5p or more a nought is added to the second column. This column continues until the price increases by more than 5p, which triggers the start of a third column (of crosses), and so on.

Example

Point and figure chart for the Bank of Scotland price movements

The idea behind point and figure is that by ignoring trivial price fluctuations, the overall trend is made much clearer. Only 'significant' price changes are shown.

The alternative to columns of crosses and zeros is to use chevrons pointing upwards for price increases and downwards for decreases. You will see these most often on charts printed from a computer since the resolution of many computer screens is not sufficient to distinguish between small crosses and zeros.

Example

Point and figure chart for the Bank of Scotland price movements

1. What is technical analysis? 2. Technical analysis compared to fundamental analysis 3. What technical analysis is not 4. Dow Theory 5. Price data 6. Volume data 7. Line charts 8. Bar charts 9. Volume charts 10. Point and figure charts 11. Other types of chart 12. Trends - the basics 13. Simple trend lines 14. Making money from trend lines 15. Trend channels 16. Support and Resistance 17. Breakouts 18. Is technical analysis for you? 19. Software for technical analysis 20. Conclusion

• An Introduction to Technical Analysis - Reuters Financial Training Series
• Technical Analysis Plain and Simple
• Technical Analysis of the Financial Markets
• Martin Pring's Introduction to Technical Analysis