CONSTRUCTION AND USE

of
POINT & FIGURE
by G. C. Smith

U.S. Government Required Disclaimer Trading foreign exchange markets on margin carries a high
level of risk, and may not be suitable for all investors. The high degree of leverage can work against
you as well as for you. Before deciding to invest in the Forex market, you should carefully consider
your investment objectives, level of experience, and risk appetite. The possibility exists that you
could sustain a loss of some or all of your initial investment and therefore you should not invest
money that you cannot afford to lose. You should be aware of all the risks associated with foreign
exchange trading, and seek advice from an independent financial advisor if you have any doubts.

Using Point and Figure

First of all, I want to give you a little background on how I came to be interested in point
and figure (P&F).
The year was 1957, a little more than fifty years ago. I was a newly commissioned Naval
officer assigned to duty at Pearl Harbor, Territory of Hawaii. Hawaii was not yet a state.
During my teenage years I had read and studied a number of books related to stock
trading. I was fascinated by stories of how money could be made simply by investing a
little time and effort. For a kid working as a bag boy at Safeway this was pretty big stuff.
Later I was to learn it wasnt that easy.
So it was no wonder in my off hours I became a part time trader in downtown Honolulu.
Since the markets in New York were six hours ahead I could often be found at my
brokers office at five in the morning.
There was just one problem. Its hard to believe, in todays hi-tech world, but in those
days there was only one way to get a stock quotation: from a blackboard on my brokers
wall. A clerk would update the board every so often from Western Union wires.
One day I chanced to meet a Chinese trader who was using a pencil and paper to keep
track of prices. Every time the chalk board was updated he would mark it on his graph
paper. Thats how I came to learn about P&F.
Over the years I purchased numerous books and manuals on P&F. It seemed there was no
end on how to use it. I remember a company called ChartCraft which was the leader in
those days. Its still around and can be found here: http://www.investorsintelligence.com
If you Google point and figure youll find a number of other sites as well.
As I point out in my manual P&F is really pretty simple to construct. Draw Xs when
prices go up and Os when its going down. What gets a little more difficult is trying to
select the size of the boxes and when to select a reversal point. Ive always used a three
box reversal but Ive seen traders use 2 and even five box reversals.

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What that means is prices must move a total of three boxes in the opposite direction for a
reversal to have happened. If you select the right size for your box, a three box reversal
usually works out quite nicely.
So how do we select the right size for our box? It doesnt matter if we are charting a
stock, stock index, commodity, or a currency pair. The procedure is the same. Try to
pick a recent period where prices are swinging back and forth. It could be an hour or
perhaps a day earlier depending on what you are charting.
In other words, a choppy period. This usually occurs at the end of a prolonged up or
down move. Nobody knows whats going to happen next so there is a period of
uncertainty that shows up on our charts. The recent move in this one day chart is a good
example. But this sort of thing occurs on all time frames, even on the one minute chart.
Here you can see prices moving sideways after a move of better than 1,000 pips. P&F is
most effective as an indicator when used in a choppy market. In a trending market it
simply moves straight up or straight down. Theres no way to tell how far it might go.

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Heres what it looks like with trendlines drawn in.

And heres what it looks like on a P&F chart.

Now, lets get back to what were trying to do: determine the size of our box. In my
example above each box is 50 pips in size. I selected that size based on a little trial and
error. What I want to see are columns, up and down, that are about seven to ten boxes in
length.
If I had selected boxes that were 100 pips in size then a reversal would take three hundred
pips, nearly the whole length of the swing.
Selecting 25 pip boxes would make the columns too long. Prices might run off the top or
bottom of the chart. More importantly, I may have too many false reversals based on a 3
box, 75 pip reversal.
What Im really trying to accomplish is enough of a move, after the reversal, that will
make some money. It might only be a move of ten pips from one latitude line to the next
on a one minute chart.
Or it could be a hundred pip move after the reversal on the one day chart. The ideal move
is a swing that earns us five percent for the day!
I usually end up using a 2 pip box on the one minute chart. Heres a good example of this
on a video I made awhile back to demonstrate P&F:
http://www.forex-trading-made-ez.com/fx042308f/fx042308f.htm
On a five minute chart I might use a four pip box like you can see in this video:
http://www.forex-trading-made-ez.com/fx110410/fx110410.htm
But again, Ill usually take a blank chart and play around with it to see what the columns
look like using various sized boxes.
Now let me give you a few other details. When Im trying to pick price swings off a chart
I usually use the Heikin-Ashi candlestick chart. This type of chart tends to filter out all
the noise you might have on a regular chart. In other words its much easier to see the
highs and lows of the swings. On the next page youll see what I mean.
When prices are moving towards the next price level I dont draw an X or O until they
actually cross that level.
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For example, prices climb to 3995 but dont reach 4000. The highest box I would mark
would be 3950. I also dont wait for the next candlestick to appear before I enter an X.
Whenever a new high or low is reached I enter it.

Here you can see how easy it is to pick off highs and lows. I usually go back about four
or five swings to start my chart. On this chart I would start my P&F chart about where
the long decline finished.
I dont try to do a lot of chart analysis on the P&F chart. I know there are traders who try
to analyze the P&F patterns much like many of them try to analyze the Japanese
candlestick formations. Ive never had much luck doing that. By the time Ive
recognized a pattern Ive usually missed the trade.
Instead I prefer to follow the indicators I describe in my report, Trading Indicators and
Their Priority, found at our membership site. When used with P&F it makes for a very
powerful combination.

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Here, for example, you can see how the indicators compliment each other. The EMAs
cross over, the MACD bars, along with the candlesticks, change color. The candlesticks
on the far right fail to go any higher as the MACD bars decline and the signal line rolls
over.
All of these indicators can assist us in the construction of our P&F chart. In turn the P&F
chart helps us pick our entry and exit points based on what we can expect in the way of a
movement from one level to the next.
The real value of P&F for me is I can see how prices tend to move up or down to test
the highs and lows. If there is no carry through prices will stop about where the previous
high or low was made. I know this is simply support and resistance, but it is much easier
to see and identify these levels on a P&F chart.
Lastly, let me show you my trading results while I was writing this report tonight. I
simply used the one day P&F chart as prices declined to keep me focused while writing.

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I was able to earn a total of 90 pips with relative ease simply because P&F was telling me
prices were continuing to decline.

Dont forget another important thing. Each position should have its own stop loss order
when starting the trade. Once the trade is going your way you can combine the stop
orders to control any serious loss.
And it goes without saying, if prices reverse on you (change direction by three boxes) get
out right away no matter how you feel about the trade. Most of the time youll just lose
more if you dont!
Here are some additional P&F videos you may want to watch:
http://www.forex-trading-made-ez.com/p-f.html
On the next page Ive included a one minute chart I reproduced just before publishing this
report at 8:00 a.m. this morning. Look how closely it resembles the 5 minute chart shown
on page 6.
Ive also included a copy of a blank P&F chart on the last page which you can copy and
use if you dont have any graph paper.

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