Point and figure charts are primarily used to identify crypto price trends. Traders can forecast future price movements by drawing trend lines on the columns. Over time, this information can be used to identify resistance lines and price floors.
In contrast to other technical charts, such as candlesticks, which plot the price movement of financial assets over specific periods, a point-and-figure chart plots prices in columns made up of stacked Xs or Os. Each of them represents a fixed amount of price movement. X-Columns represent rising prices. Meanwhile, falling prices are represented by O-Columns. Each price box represents a specific price that must be met in order to warrant an X or an O.
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In simpler terms, in point and figure charts, the price movement is referred to as a 'box.' These boxes stack in a column to form a large pattern over time. This provides a trader with a better understanding of price movement. Each percentage move is contained within a box with Xs and Os.
The box size, or the amount of price movement that determines whether a new X or O is added to the chart, is the key to point-and-figure charting. Assume that the box size is $3. If the previous X occurred at a price of $15, a new X is added to the current column of Xs when the price rises to $18.
The Point & Figure pattern can be traded in a variety of ways. The most common is to determine the levels of support and resistance. A simple way to remember support and resistance levels is that support is usually the floor, and resistance is usually the ceiling. There is support when there is a sequence of O columns, and when there is a sequence of X columns with equal highs, there is resistance. The rule is to buy when the price is at a support level and sell when the price is at a resistance level.
Point-and-figure charts do not require calculation, but they require the selection of at least two variables. The Reversal Amount setting on each chart determines the amount a stock must move in the opposite direction to warrant a column reversal. When this reversal threshold is reached, a new column begins next to the previous one but in the opposite direction.
For example, if a trader wants to plot a 5% increase in crypto price using P&F, each X represents a 5% price increase. Every 5% price drop, on the other hand, would be denoted by an O on the chart.
P&F charts are considered 'timeless.' This is because, unlike traditional charts, time does not play a role in point and figure analysis. On traditional charts, a security’s price is plotted for specified time intervals, even if the price remains unchanged. Point and figure analysis allows a trader to plot new information on the chart only if there is a price change. If the price is static, even for a long period, then the chart is left unaltered. Point and figure charts particularly help in identifying resistance and support levels.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.