If you are looking for a point and figure software, Click here to visit Forex Point and Figure System website.

Most traders are familiar with line chart, bar chart, and candlesticks, few heard about point and figure charts (P&F), even less trade with this powerful tool. Note that this is an introduction though, if you already know the benefits of P&F, and plan to use it in your currency trading, feel free to check out the above P&F system. If you know little about point & figure, don’t worry, after reading this article, you will have a better understanding whether it works for you. Then you could add point and figure chart to your trading arsenal with confidence  as well.

Why Use P&F Charts?

Forex market is a very dynamic market. The price can be both very choppy, and then trending very well. Without years of quality screen time, it is difficult for less experienced traders to effectively identify support and resistance, breakout or breakdown, and trending or ranging at real time. These basic trading concepts are the stepping stones for most profitable trading setups. With the help of P&F, even amateurs can get hands on experience of these concepts with reasonable efforts. When I added P&F to my trading tools two years ago, I found myself having a better understanding of trend following, and became more selective to my trading entries. Until today P&F is still at the top of my trading tools and I use it on a daily basis.

How To Construct P&F Charts?

P&F is constructed based on price action exclusively. There is no time factor, volume information involved as other charting systems. Point & Figure charts  are formed by alternate columns of Xs and Os, while X column represents rising price, and O stands for falling price. To build a point & figure chart, two parameters need to be pre-defined – box size and reversal box number. For any price fluctuation that is less than the box size is considered insignificant and is filtered out. For any cross-current price action that is less than the magnitude of box size times reversal box number, the price will stay at current column, and the reversal is yet to happen. For more detail about P&F chart construction, there are three great books in the PnF resources section.

Since we know the basic of P&F construction, there are two options to build P&F charts to help our forex currency trading, we can either build it manually or use a point & figure software.

It is advised to draw point & figure chart for at least one market on a daily basis. I myself update three forex markets on a daily basis, which include GBP/USD, EUR/USD, and USD/JPY. It’s a good trading routine and keep me alert to any trading opportunity to the three forex markets. I strongly suggest you to draw your own P&F charts as well. If you are familiar with the construction process of P&F, it could be done as few as 10 minutes.

“Notice how many old-timers who have been successful for years still construct their own point-and-figure charts by hand intraday” – Linda Bradford Raschke (The New Market Wizards)

Since P&F charts give less yet more reliable trading signals, it would be nice to scan through a basket of chosen markets to find the best trading opportunities. To track a variety of  markets, an automatic P&F charts drawing software will become handy and save you lots of time and energy. Click here to visit Forex Point and Figure System website.

Forex Trading P&F Example

The above candlesticks about sterling pound offer a perfect example how to apply P&F chart to trade a range-bound forex market. From 1/21/2010 to 1/28/2010, pound moved into a less than 200pips range for 5 days. The price roughly tested both the upper and lower bound three times, which indicated rather strong support and resistance level, especially, the lower bound of the range had a confluence with the 61.8% Fibonacci retracement level. This range-bound price action was crystal clear on its corresponding P&F chart. The range was characterized by a triple top at 1.6266 and a triple bottom at 1.6100.

Once a trading range is clearly defined, there are two forex trading strategies could be applied to take advantage of this well-defined pattern. The first trading strategy is to short at the top of the range, while long at the bottom of the range. Of course you can’t just blindly long or short, a better way to short at the range top is waiting for a bearish signal is given, while long at the range bottom when a bullish signal is present. We might make less forex pips this way, but it significantly increase the odds of winning while spend less time in a position while testing the top or the bottom of the range.

Although a well established ranging market is notoriously for fake breakouts or breakdowns, there always exists the possibility of range top breakout or a range bottom breakdown. So the second trading strategy is to be well prepared for such breakouts or breakdowns. Finally, on 1/29/2010, sterling pound made a triple bottom breakdown. After the breakdown happened, as long as pound stays below 1.6100, we will remain bearish and hold our short position to the full extent if we do a position trade.

The above sterling pound trading example clearly demonstrated how to trade currency successfully with point and figure charts on range-bound market.

PnF Resources

1. Forex Point and Figure System by Hector Trader
2. Point & Figure Charting: The Essential Application for Forecasting and Tracking Market Prices by Thomas J. Dorsey
3. The Definitive Guide to Point and Figure by Jeremy Du Plessis
4. Complete Guide to Point-and-Figure Charting by Heinrich Weber and Kermit Zieg

To learn more about how to apply point & figure charts to forex currencies trading, click here to visit Forex Point and Figure System.

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