Extra P&F

Technical Analysis

Point and Figure Charting

http://spreadsheetml.com/chart/pointandfigure.shtml

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Table of Contents

1. Point and Figure Charting ...................................................................................................... 1-1
1.1 Background ................................................................................................................... 1-1
1.1.1 Plotting the Point and Figure Chart ................................................................ 1-1
1.1.2 Common Parameters ...................................................................................... 1-2
1.2 Some common patterns ............................................................................................... 1-3
1.2.1 Bullish Signal ................................................................................................... 1-3
1.2.2 Bearish Signal ................................................................................................. 1-3
1.2.3 Support ............................................................................................................ 1-3
1.2.4 Resistance ....................................................................................................... 1-4

2. Point and Figure Chart Spreadsheet..................................................................................... 2-5
2.1 Automatically downloading data .................................................................................. 2-5
2.2 Using external market data .......................................................................................... 2-6
2.3 Advance Point and Figure Chart.................................................................................. 2-7
2.4 Point and Figure Charting for FOREX ......................................................................... 2-8

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ConnectCode’s Technical Analysis Templates

Have you thought about how many times you use or reuse your technical analysis models?
Everyday, day after day, model after model and project after project. We definitely have. That is
why we build all our technical analysis templates to be reusable, customizable and easy to
understand. We also test our templates with different scenarios vigorously, so that you know you
can be assured of their accuracy and quality and that you can save significant amount of time by
reusing them. We have also provided comprehensive documentation on the templates so that you
do not need to guess or figure out how we implemented the models.
All our template models are only in black and white color. We believe this is how a professional
technical analysis template should look like and also that this is the easiest way for you to
understand and use the templates. All the input fields are marked with the ‘*’ symbol for you to
identify them easily.
Whether you are a financial analyst, stock investor, investment banker or trader. Or whether you
are a student aspiring to join the trading world or an entrepreneur needing to understand
investment, we hope that you will find this package useful as we have spent our best effort and a
lot of time in developing them.
ConnectCode

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1. Point and Figure Charting

1.1 Background

Point and Figure charting is a technical analysis technique that uses a chart with “X”s and “O”s for
predicting financial asset prices. The “X”s are used to indicate rising prices and “O”s to indicate
falling prices. The point and figure chart is very unique as it does not plot prices against time like
other technical analysis charts. Volume is also not taken into account, so it is basically a chart
based purely on price movements. The diagram below shows a simple Point and Figure chart.

This chart and its associated techniques are more than a century old and are now used by many
traders as part of their technical analysis toolkit.

In the diagram above, the "X"s indicate rising prices while the "O"s indicate falling prices. Notice
that the "X"s and "O"s are always in different columns. Basically, each time the price changes by a
certain amount in the opposite direction, it is plotted in a new column. If the price is moving in the
same direction, it is plotted in the same column.

1.1.1 Plotting the Point and Figure Chart

To get a rough idea of how the chart is plotted, assume a stock is currently priced at $13 and the
price is in a downward trend. The first price $13 is plotted in the diagram below as the first “O”
marked by the blue box. The price then drop to $11.90 and the second “O” is plotted. The price
drops further to $10.80 and then third “O” is plotted. Now the price movement starts to reverse in
trend. It rises to $12. At this point in time, nothing is plotted on the chart. In a Point and Figure
chart, a reverse in trend requires the price to rise by a certain amount. Let’s assume for now that
it requires the price to rise by 3 or more boxes before an “X” is plotted. Now if the price rises to
$14.20. Three “X”s indicated by the red box will be plotted on the chart. If the price rises further
to $15.10, the next “X” will be plotted.

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1.1.2 Common Parameters

There are two important parameters to take note of in the Point and Figure Chart. They are the
Box Size and the Number of Boxes.

• Box Size

The size of the change in prices before plotting an "X" or "O" is plotted. By defining a box
size, small changes in price are not reflected in the chart. This allows small fluctuations or
noise to be filtered out from the chart. In the diagram and example above, the box size is
set to $1. That means any increase or decrease by $1 will require an "X" or an "O". When
plotting the point and figure chart, the direction of the price is always taken into
consideration. For example, in an upwards trend, an "X" will be added if the price rises
beyond the box size. In a downward trend, an "O" will be added if the price falls below
another box size.

A typical box size for a stock trading from $1 to $5 is $0.50 while a stock trading from $5
to $20, it is $1.

• Number of Boxes for Reversal

The Number of Boxes for Reversal is used when the price changes in direction. In an
upward trend, to plot an "O" of the reverse direction, it requires significant movement in
the opposite direction before the trend is considered to have reversed. The number of
boxes here is for specifying the amount (or the number of change in boxes in the reverse
direction) before an "O" is plotted. For example, if we provide 3 as the Number of Boxes
for Reversal, during an upward trend, it requires a negative change in price of 3 boxes
before an "O" is plotted. This is the same for the downward trend. An increase in price
equivalent to 3 boxes is required before an "X" can be plotted. When the reverse trend is
met, three consecutive "X"s or "O"s are plotted. The reverse in trend is plotted in a new
column.

The diagram above shows the price is initially in an upward trend. Then prices started to
fall by 3 or more boxes. The three “O”s are thus plotted in a new column in the chart. This
is where the beauty of Point and Figure comes into the picture. It takes several boxes to
reverse a trend. That means only significant change in price movements is considered,
other changes are treated as noise and ignored.

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1.2 Some common patterns

This section illustrates some very common patterns traders use for predicting prices.

1.2.1 Bullish Signal

The diagram above shows a bullish signal. Notice each time the trend reversed to “X”, the price
went higher than the previous high. If a simple trend line is draw at the bottom of the "X"s, it
shows an upward trend.

1.2.2 Bearish Signal

The diagram above shows a bearish signal. Notice each time, the trend goes downwards. The new
low is lower than the previous low.

1.2.3 Support

The red line in the diagram below shows the support line. If the price suddenly drops below the
support line, it is a signal that there is a high chance that the trend has changed and the trader might
want to consider selling the assets.

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1.2.4 Resistance

The green line below shows the resistance line. This is where an asset’s price will encounter
resistance as it moves towards the resistance line.

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2. Point and Figure Chart Spreadsheet

This is a collection of spreadsheets that handle various Point and Figure charting scenarios. The
users can either copy-and-paste market data into the spreadsheets or download data
automatically from http://finance.yahoo.com to plot the chart.
Various parameters like Box Size and Reversal are provided. Each “Box” in a Point and Figure chart
is shown in the first column of the spreadsheet. Spaces above and below the range of prices that
the stock is trading in are also provided in case the chart is going to be further used for plotting
manually. There are many investors and traders who enjoy plotting the charts manually to get a
better feel of the market instead of just looking at the chart.

2.1 Automatically downloading data

The PointAndFigureCharting-AutomaticDownloadData.xls spreadsheet automatically downloads
data from http://finance.yahoo.com and placed them in the DownloadedData worksheet.

Various parameters about the stock and dates for downloading data are described below.
• Start Date (MM/DD/YYYY)* - The start date to download the stock prices.
• End Date (MM/DD/YYYY)* - The end date to download the stock prices.
• Stock Quotes Frequency* - The frequency of data download, e.g. Daily, Weekly or
Monthly.
• Stock Symbols* - Prices and Volume information of this specific stock symbol will be
downloaded.
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• Download and Chart button- Download the stock data and generate the Point and Figure
Chart in in the "Output" worksheet.

Box Sizes and the Number of Boxes Before Reversal as explained in the previous sections can be
configured in the Professional version of the spreadsheet.
Upon clicking on the Download and Chart button, data will be retrieved from the
http://finance.yahoo.com site and placed in the DownloadedData worksheet.

The data in the “DownloadedData” worksheet is then used to plot the Point and Figure chart in the
Output worksheet as shown in the diagram below.

2.2 Using external market data

Instead of downloading data automatically, the user can choose to use existing market data with
the PointAndFigureCharting.xls spreadsheet. If the files are available in Commas Delimited Values
(CSV) files, simply copy and paste the data in the Date, Open, High, Low, Close format into the
“DownloadedData” worksheet. Next go to the Input worksheet and click on the "Chart" button. The
Box Size and Number of Boxes before Reversal can be configured in the professional edition of the
spreadsheet.

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2.3 Advance Point and Figure Chart

The stock price sensitivity is different at different price points. In simple terms, this means an
asset typically moves by a different amount at different price points. For a penny stock, a tick may
represent a movement of several cents. Whereas for a stock over hundreds of dollars. A tick may
represent a movement of several dollars.
Different Box Size may be required for stocks of different prices. Moreover, a stock may move
from over hundreds of dollars to a penny stock. Mechanisms to make sure their movements are
capture accurately is required in the Point and Figure chart. This is achieved by using multiple Box
Sizes in a single chart. This is shown in the diagram below and is supported by the
PointAndFigureCharting-MultipleBoxSize.xls spreadsheet for charting with external data and the
PointAndFigureCharting-MultipleBoxSize-AutomaticDownloadData.xls spreadsheet for charting with
data downloaded automatically from http://finance.yahoo.com.

Being able to specify multiple box sizes at different price points also allows different types of
assets like commodities and currencies to be charted easily.
In the diagram above, for prices from $5 to $20 the box size is $0.5 while from $20 to $100 the
box size is $1. This is reflected in the first column of the Point and Figure chart as shown in the
diagram below. Each box is of the size $1 when the price is equal to or more than $20. Below $20
the box size is $0.5.

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2.4 Point and Figure Charting for FOREX

Though Point and Figure charting can be easily applied to FOREX, the movements of some
currency pairs may require the support of a very small (or very large) Box Size.
The “forex” subfolder contains Point and Figure Charting spreadsheets that are able to support the
following:

• Box Size – 0.0001 to 1000
• Number of Boxes for Reversal – 1 to 50
With the wide range of parameter values, the different currency pairs can be charted very
accurately. On top of that, users using Excel 2007 and above will be able to chart more than 255
columns, to capture a long series of fluctuations in a single chart.

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www.investorsintelligence.com, January 2005
[email protected]

Investors Intelligence Using Point & Figure Charts

Point and figure (p&f) charts provide a simple, yet disciplined method of identifying current or emerging
trends in stock prices. This brief guide aims to familiarise the investor with the basic concepts behind p&f
charts and highlights some of the benefits from using them in one’s investment procedure.

The balance between buyers and sellers

P&F charts map out the relationship between supply (created by sellers) and demand (created by buyers) at
different price levels.

• When demand outstrips supply (more buyers than sellers), stock prices rise and this is depicted by a
column of Xs on the chart.

• Conversely, when supply outstrips demand, (more sellers than buyers) prices fall and this is depicted
by a column of Os on the chart.

The objective of a p&f chart is to identify the points at which established supply/demand relationships change
(these are known as “breakouts”). These changes will very probably lead to a future significant move in the
stock price.

An example, the chart of Du Pont shows a recent
trading range of $41-$44:

At the $44 level (red line) there is more supply than
demand as sellers step in and prices retreat.

At the $41 level (blue line) there is more demand than
supply as buyers step in and prices rise.

In this case, a breakout (change in the supply/demand
equilibrium) will occur when the range bands are
breached on a move above $44 or below $41.

What makes p&f charts so different?

There is no doubt that point & figure charts look very different from the now more common chart formats
such as bar charts but with a little effort one quickly appreciates their simple yet effective approach – “point &
figure charts shout where other charts merely stutter”. Notable features are as follows:

• No time axis - unlike bar or candlestick charts, p&f charts have no horizontal time axis – only price
change generates chart action.

• The 3 Box reversal rule - P&F charts will not change direction (i.e. from a column of Xs to a column of
Os) unless the price moves more than 3 ‘boxes’ (or unit of price) in the opposite direction. There can
therefore be no fewer than three boxes in a column. This reversal technique is one of the key strengths
to p&f charting as it effectively filters out minor fluctuations to reveal patterns.

• Semi log scale - the Y axis scale on a p&f chart is graduated to allow one to view and compare similar
signals for different prices stocks.

• Clear cut signals – what makes p&f charts so popular is the clarity of signal: each stock is either on a
buy or on a sell and identifying when this signal changes is well-defined and easy to spot.

• Support/resistance levels easy to identify due to the almost diagrammatic box format.

• Stop and target levels are calculated for every breakout signal

1

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P&F Chart Construction

Our web site generates both the p&f charts and the resultant signals for you (and we e-mail you when a
signal changes).However, it is important to have an understanding of how p&f charts are constructed. The
following exercise aims to demonstrate how p&f charts develop and highlights just how quickly patterns
emerge.

A stock was recently floated at $50. It moves steadily higher from 56
$50 to $55, with hardly any pull-backs. 55 X
54 X
The stock then starts to attract profit-taking and the price trades 53 X
down by $2 to $53. However no movement is shown on the chart 52 X
because the ‘3 box reversal rule’ requires the price to move by 51 X
three price units in the opposite direction below the highest point 50 X
of the column of Xs i.e. $55-$3 = $52 before registering the move.

The stock then trades down to $52, triggering the 3 box movement 56
and the chart reverses down by 3 price units. 55 X
54 X O
53 X O
52 X O
51 X
50 X

Each subsequent move in the established direction is recorded as 56
it happens. Here the stock trades down by another $1 to $51 so 55 X
we add another O to the chart 54 X O
53 X O
The stock could trade back up $2 to $53 but no chart action will be 52 X O
shown since the 3 box reversal rule requires three price unit 51 X O
movements above the $51 low point to $54 (i.e. $51 + $3) before
registering on the chart.. 50 X

The stock trades up by another $1 to $54, making a $3 increase 56
and so triggers a up reversal of the full price rise to $54. 55 X
54 X O X
53 X O X
52 X O X
51 X O
50 X

As the stock price continues its upward movement, by $2 to $56, 56 X O X
each new movement is registered on the chart. In this instance, 55 X OX
we have our first breakout, a p&f bull signal, generated when the
current up column (Xs) moves above the previous up column of Xs 54 X O X
53 X O X
52 X O X
51 X O
50 X

2

www.investorsintelligence.com, January 2005
[email protected]

P&F Scaling

Semi Logarithmic Scales

Stock charts use a semi-logarithmic scale so that price formations remain appropriate at different levels.

The classic scale is as follows:

Up to $5 0.25 per box
$5 - $20 0.50 per box
$20-$100 1.00 per box
$100 upwards 2.00 per box

We have recently introduced the new extended semi-log scale which provides a more sensitive scale for low
priced stocks and also handles high priced indices more appropriately.

Up to $5 0.10 per box
$5 - $10 0.20 per box
$10-$20 0.50 per box
$20-$100 1.00 per box
$200-$500 5.00 per box
$500-$1000 10.00 per box
$2000-$5000 50.00 per box

Fixed Scales

For indices, we generally use a fixed scale which is selected by balancing the necessary sensitivity with the
efficacy of signals produced.

For example, the S&P500 index
currently uses a 5 point box scale.

For breadth indicators and other oscillators with scales from 0% to 100%, we use a fixed 2% scale i.e. using
a 3 box reversal it takes a 6% move to reverse the indicator.

3

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P&F Support and Resistance Levels

Whilst we are fully acknowledge the warning ‘past performance is no guarantee of future performance’
support and resistance levels emerge as patterns showing how investors have actually behaved at certain
price levels – ie the price at which demand for a stock outstrips supply (price ‘support’) and the price at which
supply outstrips demand (price ‘resistance). A breach of these expected levels is important in signalling a
new trend.

Support levels are identified as a horizontal row of Os which OXOXOXOX
represents a level at which demand overcomes supply i.e. where OXOXOXOX
buyers feel confident to step in. OXOXOXOX
OXOXOXOX
OXOXOXOX
OXOXOXO

Support

Resistance levels are identified as a horizontal row of Xs which Resistance
represents a level at which supply overcomes demand i.e. where
sellers feel confident to step in. XOXOXOXOXOX
XOXOXOXOXOX
XOXOXOXOXOX
XOXOXOXOXOX
XOXOXOXO
XOXOXOXOXOX

Long Term Support Levels or “Green Zones”

An examination of long term p&f charts will often reveals levels at which stocks consistently find support (we
reduce the display size of Xs and Os to do this). We refer to these levels as “green zones” from which we will
be actively watching for new p&f bull trends to emerge since the next price moves are, on past performance,
likely to be upward . We look for further confirmation such as selling climaxes (particularly if on high volume)
and evidence of insider buying.

4

www.investorsintelligence.com, January 2005
[email protected]

Long Term Resistance Levels or “Red Zones”
Conversely, stocks reaching areas where they consistently find resistance are known as “red zones”. These
are levels at which caution should be exercised, since the next price moves are, on past performance, likely
to be downward. Here we would initiate a stop loss policy to limit our losses.

5

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[email protected]

Trend Lines
Trend lines are very important in point & figure analysis. The saying that ‘the trend is your friend’ is certainly
true.
The Bullish Support Line
Stocks above their bullish support line should be assumed to be in long term uptrends.
The line does not connect points and can therefore be drawn immediately when an uptrend begins. It is
drawn from the lowest point made after the completion of a bear trend or a significant down move. It is
always drawn at a 45 degree angle, intersecting ascending corners of the squares on the chart.
Long positions should be considered while the stock is above the bullish support line.
A break of a bullish uptrend line (that has been in place for a considerable amount of time) is considered to
be a bearish event.
The bullish uptrend line for Cisco (shown below) has been in place since 2002.
By November 2004 (date of the chart) the stock has retraced below the bullish uptrend line and although
there is a great example of horizontal support shown by four down columns of Os reversing back up at the
same level.

6

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The Bearish Resistance Line
Stocks below their bearish resistance line should be considered to be in long term downtrends.
The line is drawn from the highest point on completion of a significant uptrend and is extended downwards at
an angle of 45 degrees as far right as possible.
Short positions should be considered while the stock is below the line and any buy signals given below this
line should be disregarded.
A break of the bearish resistance line is considered to be a very bullish event.
In the chart of Bristol Myers Squibb below, the price has remained below the bearish resistance line since
December 2001. In February 2004, it failed again at the line.

7

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Relative Strength Charts

Movement of stocks, to a greater or lesser degree, is influenced by the trends of the headline market indices
and it is often said that “a rising tide lifts all boats”. Relative strength charts aim to eliminate this market factor
providing a more accurate way of comparing a stock against its peers.

The relative p&f chart is a ratio of the stock price divided by the index price. The two indices most useful for
relative purposes are the Dow Industrials and the S&P500 indices. To bring the ratio number up to a
chartable level, we currently multiply the resultant ratio by 10,000 for Dow relative charts and 1,000 for
S&P500 relative charts.

For example,

Anheuser Busch (BUD) is finding
resistance at around $54 but remains in a
p&f uptrend.

What should we do with the stock?

Looking at the relative chart for BUD… it suddenly
becomes much clearer…

The stock gave a p&f sell back in November 2002 – look
at the downtrend in the relative chart since then!

8

www.investorsintelligence.com, January 2005
[email protected]

Determining Price Objectives

There are several methods for determining the price objective on a point & figure chart, the most popular is
the vertical count method. This is a mathematical calculation applied to all new p&f signals that provides a
good ball-park figure of what could be achieved from that signal. A quick risk reward ratio of any buy signal
can be calculated by comparing the price objective to the stop loss level (below the prior down column for a
p&f buy).

We would also suggest studying areas of overhead resistance and looking for the bearish resistance line
when considering the likely upside potential for a stock.

Calculations for a buy signal 56 OXOXOX
55 OXOXOX
To determine the vertical count for a buy signal, count the number 54 OXOXOX
of Xs to the right of the low point, multiply by the box size and 53 OXOXOX
multiply by 3. 52 OXOXOX
51 OXOXOXOX
For example, in the example opposite, the stock generated a triple 50XOXOXOX
top buy at $56 but the low point was the first column of Os down to
$51.

We therefore count the column of Xs next to this column i.e. 5
boxes multiplied by the box size ($1) multiplied by 3 = $15

To get the price objective, we add $15 to the low point i.e.
$51 + $14 = $65

Calculations for a sell signal 56 XOXOXO
55 XOXOXO
To determine the vertical count for a sell signal, count the number 54 XOXOXO
of Os to the right of the high point, multiply by the box size and 53 XOXOXO
multiply by 3. 52 XOXOXO
51 XOXOXO
For example, 4 boxes in down column to the right of the high point 50 XOXOXOX
at $56, multiplied by the box size ($1), multiplied by 3 = $12.

Price objective subtract $12 from high point $56 = $44.

9

Point and Figure Charts

Point-and-figure (P&F) chart is a special type of graphical analysis, which lays stress to prediction of medium-term
and long-term trends.

Conclusion

Let’s single out advantages and disadvantages of Point and Figure charts.

Point and Figure Advantages

1. P&F charts send only clear buy or sell signals without any dual nature.
2. P&F charts take into account only “important” price changes and filter out market noise. This being said, the

“importance” of changes is set by a trader.
3. P&F charts are not affected by time effect, which sometimes introduces additional element of uncertainty on

general charts.
4. P&F charts allow to identify support and resistance levels, and also trend lines.
5. P&F charts are very intelligible.

Point and Figure Disadvantages

1. P&F charts send clear signals only for medium-term and long-term periods and are almost not intended for
short-term trade.

Building Point and Figure Charts

The majority of the most popular charts, used for technical analysis, are built in accordance with opening price,
closing price, maximum or minimum for a definite period. Only closing price for a period is used for building Point
and Figure charts.

Point and Figure charts consist of X and O columns, which reflect the filtered price changes. Increase in prices is
shown by “X” boxes, and drop in prices is shown by “O” boxes. New boxes are created only in case of price change by
the size of a box or more in one of directions.

As a result, each chart has a setting called “box size” – conventional unit of price movement direction, which is
shown on a chart. Box size is an amount of pips, on which price should move above the current X box (or below the
current O box) for a new Х (or О) box to be created and added to the chart. For example, if price increased by three
conventional box sizes, it will be displayed on a chart like three X boxes.

If there is a reverse of price movement, a new column of O boxes will be displayed on a chart. This being said, X and
О boxes never appear in one and the same column.

Besides, each chart has a setting called “reversal threshold”, which defines the amount of pips, necessary for a new
column to be created and a chart to start moving in the opposite direction (downwards, if a previous column was the
column of Xs, or upwards, if a previous column was the column of Os). When a reversal threshold is crossed by price,
a new column, which moves in the opposite direction, will be created next to a previous column.

Thereby, if securities move, for example, in ascending trend, a chart will show the growing column of Xs until these
securities move downwards for a distance more that a reversal threshold (as a rule, several boxes represent a
reversal threshold, for example, 3 boxes). The same situation occurs in case of appearance of a column of Os.

It is necessary to remember two important specific points:

1. There is no linear time scale on Point-and-figure charts, so each column can represent several minutes or
several days depending on price movement patterns.

2. There is no definite price value in a box on Point-and-figure charts. On the contrary, a certain range of price
values is displayed, which is situated within the limits of the box size.

Point and Figure Charts Signals

- Reversal pattern signals

Appearance of a new column of Os is a signal to sell.
Appearance of a new column of Xs is a signal to buy.

- Support and resistance levels

Support and resistance levels are always horizontal lines because of specifics of Point and Figure charts. Support level
appears on Point and Figure charts if there is a row of successive O columns, which minima are situated on a level.
Resistance level appears on Point and Figure charts if there is a row of successive X columns, which maxima are
situated on a level.

You should remember that the XO chart doesn’t point to a specific level, but to a support zone (equal in size to the
box size), because arrangement of minima of several successive O columns on a level doesn’t mean that prices have
stopped exactly on this level, but indicates that prices simply haven’t passed below more than one box. The same is
true of resistance levels.

- Trend lines

Support and resistance levels are always lines with 45-degree slope because of specifics of Point and Figure charts.

It should be noted that in most cases the current position of a trend line on a Point and Figure chart is not match the
position of the same line on a bar and candle chart in point of price. There are two reasons: firstly, Point and Figure
chart doesn’t reflect the real minima and maxima of the market, but only points to their position in the diapason of a
box; secondly, time scale is non-linear.

Point and Figure Charts Patterns

Double Top and Double Bottom Patterns

These two patterns are the simplest trading signals on a Point and Figure chart. A double top signal is a signal for
buying, which appears when a column of Xs goes beyond the top of the previous column of Xs. A double bottom
signal is a signal for selling, which appears when a column of Os goes below the bottom of the previous column of
Os.

In order to identify double top or double bottom patterns you should single out three columns, and it would be
enough. Double top or double bottom patterns only help you to understand when a price reaches a position higher
or lower than the previous one. These patterns also indicate that price movement is likely to continue in the
direction of the breakout. You can use double top and double bottom patterns for identifying short-term trends.

Simple identification of stop-loss points should be specially singled out among many useful features of Point and
Figure charts. For example, a trader can identify the price, where the breakout occurs, and place a stop a bit lower
this price. In case of a false breakout the market will go back to the congestion zone right away, taking position
above the new minimum, marked by double bottom, or below the new maximum, marked by double top. If there is a
real breakout, your loss will make no more than a few pips.

The Triple Top/Bottom Patterns

A triple top pattern is a more complex signal for buying. In this case one column of Xs should go above the top of two
columns of Xs. The Triple Top signal means that the momentum is strong. It also indicates that bulls couldn’t to push
the price above a certain price level two times in the past. A triple bottom pattern is a more complex signal for
selling. In this case one column of Os should fall below the bottom of two columns of Os.

In order to form the Triple Top/Bottom pattern there must be at least five columns. The more columns are in Point
and Figure patterns, the larger price targets are and the more dramatic the breakouts are.

When the triple top pattern or the triple bottom pattern signals you about possibility to buy or to sell, you should
determine a strategic price target. It is usually done by means of multiplying the number of columns within the
pattern by the box size. For instance, if a pattern is six columns wide and the box size is 0.5, then the $3 target in this
case exceeds the risk by a factor 3/1, thus making this trade very attractive.

Look at the Picture 3 and you will see how Point and Figure patterns can be used as trading strategies. The double
bottom sell signal is placed near $18. There are three possible decisions in this case: buying put options, closing long
positions or selling short. At least, it would be wise to think about closing long positions in case of Point and Figure
chart showing a sell signal. Point and Figure chart is created to filter out market noise, i.e. it takes into account only
important price changes. Thus, Point and Figure chart should reliably show changes in the trend.

Point and Figure Charts Patterns - Summary Table

XO Bearish Support XO Bullish Support XO Descending Triple Bottom

XO Double Top XO Head-Shoulders XO Rectangle

XO Spread Triple Bottom XO Triple Bottom

Short Selling to Profit

It happens that traders try to sell the stock short. In this case traders simply sell a stock they do not own. In order to
do this, traders have to use a margin account, and it is a very risky initiative. In case of placing a short position
traders borrow the stock with a view to make profit from price declines. The borrowed stock should be repaid later
on. Moreover, traders must pay borrowing cost and other redemption fees. In case price goes higher traders will
need to cover losing positions by buying the stock back. Thereby, there is a very high percentage of risk of suffering
losses, while the gain is limited.

Buying a Put Option

Buying a put option is a more moderate strategy. In this case, you can make profit from price declines, but at the
same time you will be protected by limited risk. So you won’t lose more that you’ve spent on purchasing the option.

Point and Figure Chart is a Very Useful Tool

No matter what strategy you have chosen, because all three of them would have been successful in the scenario,
which you can see on the Picture 3. Let’s consider this case: as you see, the double bottom sell signal had occurred,
and then the stock went straight down and fell more than 50% during the next month. In case of buying put option
and selling short traders would have profited, but the amount of profit would have depended on time of closing their
positions. In case of closing long position a trader would have sold almost 10% from the highest price reached in the
previous rally.

XO Metatrader Indicator

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Risk Warning

Before deciding to participate in the Forex market, you should carefully consider your investment objectives, level of
experience and risk appetite. Most importantly, do not invest money you cannot afford to lose. There is considerable
exposure to risk in any off-exchange foreign exchange transaction, including, but not limited to, leverage,
creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or
liquidity of a currency or currency pair.