Chapter 6 - Point and Figure Charting

Question 1

What is a compound fulcrum?

Answer 1

A point and figure chart formation that
appears at market tops or bottoms, prior to
the market breaking out.

Question 2

What is a fulcrum?

Answer 2

A point and figure chart formation that is
characterized by a consolidation area with
multiple tests of solid support or resistance

Question 3

What is an inverted V?

Answer 3

A chart formation that signals an abrupt
end to an uptrend; prices spike higher,
reverse and spike down, leaving a “V”-like
pattern behind.

Question 4

What is another name for rounded tops and rounded bottoms?

Answer 4

Saucer tops and saucer bottoms.

Question 5

What is a V base?

Answer 5

V base and inverted V patterns are named for their similarity to the letter V. They are
characterized by a smooth but swift decline and a symmetrical reversal.

Question 6

Explain the differences between bar and P&F charts.

Answer 6

P&F charts differ from bar charts in two important ways:

– P&F charts make no reference to time units
– P&F charts require specified minimum movements before any plot is made.

Question 7

Explain the benefits and drawbacks of P&F charting.

Answer 7

• P&F charts can help identify support and resistance levels that may not be apparent on
  bar charts.
• P&F charts offer a different way of calculating measured moves; a measured move on
  a bar chart is based on a vertical move (i.e., a price projection); a measured move on
  P&F charts is based on a horizontal move (i.e., the number of columns it takes for the
  formation to develop).
• P&F charting is very flexible, allowing analysts to adjust the box size and reversal
  criteria to suit their own needs.
• The biggest drawback of P&F charts concerns the way they are created; because time is
  ignored, certain formations readily visible on a bar chart (e.g., gaps, islands, flags, key
  reversals, etc.) are not visible.

Question 8

Explain the concept of P&F trendlines and measured moves.

Answer 8

• Trendlines on P&F charts are typically drawn at 45-degree angles.
• Measured moves on P&F charts come in two forms: aggressive and conservative.
• The aggressive measured move adds the width of the formation to the breakout point.
• The conservative measured move adds the width of the formation to the base of the
  formation.

Question 9

What are the various P&F chart formations?

Answer 9

• Many formations that appear on bar charts can appear on P&F charts as well.
• Some unique P&F chart patterns include the fulcrum and compound fulcrum, V base
  and inverted V, and saucer top and saucer bottom.

Fulcrum and compound fulcrum

• A fulcrum can appear at a market top or bottom, and it is characterized by a
  consolidation area with multiple tests of established resistance (top) or support
  (bottom).
• A compound fulcrum consists of two fulcrums prior to the reversal.

V base and inverted V

• The V base (bottom) and inverted V (top) are characterized by swift and smooth moves
  to market extremes, with a symmetrical swift and smooth reversal.

Saucer top and saucer bottom

• Saucer tops and bottoms represent slowly developing shifts in a trend.
• They are very hard to trade because they usually contain several price swings.

Question 10

What are two important differences between bar and P&F charts?

Answer 10

1. Bar charts are plotted at specific intervals (hourly, daily, weekly, monthly, etc.) regardless
   of any change in price. In contrast, plots on a P&F chart are concerned only with price
   movements and have no reference to specific intervals of time.
2. Bar charts plot every change in price, whereas P&F charts only show plots when prices
   move by a certain amount. As discussed in Chapter 2, a plot on a 1 × 3 P&F chart will
   only be recorded if prices move in the direction of the current trend by at least $1. If prices
   move in the opposite direction, it would take a movement of $3 for a plot to occur. Readers
   unfamiliar with P&F charting should review this topic in Chapter 2.

Question 11

Why would someone use point and figure charting?

Answer 11

Point and figure charts are a way to visualize price movements and trends in an asset without regard to the time that passes. P&F charts use columns consisting of stacked Xs or Os, each representing a set amount of price movement. The Xs illustrate rising prices and the Os represent falling prices. Point and Figure (P&F) charts are used in stock trading to track only significant price movements, ignoring minor fluctuations and the time element. This makes trends easier to spot and helps traders focus on important price changes.

Question 12

Explain how to take a measured move using P&F charting. You will need to cross-reference your figures when studying this question.

Answer 12

Figure 6.3 shows two types of measured moves that can be used once a support or resistance
pattern develops. Pattern A is 17 columns wide and, when it finally breaks bullishly, has two types
of measurements you can use. The aggressive measurement (A1) takes the width of the pattern
and adds it to the breakout point.1 The market met this price objective some time later after
breaking out of a second consolidation pattern. The second, more conservative, measurement
(A2) takes the width of the consolidation and adds it to the base of the pattern. The market
reached this objective on the initial breakout.