Point & Figure charting has a long history. One of the first references to Point & Figure charting came from an anonymous writer named "Hoyle", who wrote The Game in Wall Street and How to Successfully Play It in 1898. Early Point & Figure Charts were drawn using numbers. Hence, they were simply referred to as "Figure Charts". These figure charts evolved into charts with X's and a few numbers. A.W. Cohen is credited with the classic 3-box Reversal P&F charts with X's and O's. Cohen wrote several books on this "Three-Point Reversal Method" and became the editor of ChartCraft.

Before computers, P&F charts were popular because it was simple to maintain a large collection of charts. Using just a pencil, a newspaper and some graph paper, P&F chartists were able to update and analyze 50 or more charts every day - in less than an hour. StockCharts.com offers three different Point & Figure charting options as well as the ability to scan 1000s of stocks for specific patterns.

Letting your emotions override your plan or system is the biggest cause of failure.
J. Welles Wilder
While most traders are comfortable with simple clean charts with a minimal amount of indicators, notes and line-work, over the years I have added and deleted from my traders toolbox when tools no longer work. Point and figure is a tool that has lasted my entire trading career.

I started a subscription to Chart Craft point and figure service in the summer of 1987 and studied their use until my first trade in December 1987. Using point and figure method I bought IBM and rode it for the better part of a year.

The charts are constructed by deciding on the value represented by each X and O. Any price change below this value is ignored so point and figure acts as a filter to filter out the smaller price changes. The charts change column when the price changes direction by the value of a certain number of Xs or Os. Traditionally this was one and is called a 1 box reversal chart. More common is three, called a 3 box reversal chart.

2.7 Buy and Sell Signals

Because point and figure charts are plotted on squared paper, 45 degree lines may be used to define up trends and down trends from important highs and lows on the chart allowing objective analysis of trends.

Basic Analysis
There are four things to look for on a Point & Figure chart.
Support Levels, Resistance Levels, Upward Trend lines, Downward Trend lines
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Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. Support levels are easy to spot on P&F charts. In particular, a sequence of O-Columns with equals lows marks a clear support level.

Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. Resistance levels are also easy to spot on P&F charts. In particular, a sequence of X-Columns with equals highs marks a clear resistance level.

Trend lines are drawn automatically on the Point & Figure charts.
Bullish Support Line - An upward sloping trendline.
Bearish Resistance Line - A downward sloping trendline.
Bullish Support Lines slope up at 45 degrees and start from an important low.

At a minimum, it takes a column sequence of 5-3-5-3-5-3 to produce an advance steep enough to maintain this angle. X-Columns need to be at least 5 boxes with O-Columns a maximum of 3 boxes. An X-Column greater than 5 would allow for an O-Column greater than 3.

Bearish Resistance Lines slope down at 135 degrees (180 - 45 = 135) and start from an important high. A similar ratio is needed to maintain the slope of a Bearish Resistance Line. A column sequence of 5-3-5-3-5-3 is needed to maintain the slope. O-Columns need to be at least 5 boxes with X-Columns a maximum of 3 boxes. An O-Column greater than 5 would allow for an X-Column greater than 3.

A detailed history can be found in Jeremy du Plessis’ "The Definitive Guide to Point and Figure" where many references and examples are cited. More from Wikipedia http://en.wikipedia.org/wiki/Point_and_figure_chart

About Cousin Vinny
Cousin Vinny is the internet pseudonym for TLLeBlanc, Architect who started trading in 1987. Practicing Architecture for over 30 years, Mr. LeBlanc found the technical aspects of building, design and construction prepared him well for fundamental and technical analysis.

He is a family man, a native of New Orleans, currently residing in New Jersey.
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