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Learn Forex – Forex Point and Figure Trading

(Please click on the forex chart thumbnail to enlarge)

Learn Forex (FXpath.com) – In any financial trading market, including forex, some may characterize point & figure trading as trading based upon pure price action. This is because only price, which is undeniably the most important aspect of technical analysis, is customarily included on this type of chart (in the form of X’s and O’s). Other data that can readily be found on bar and candlestick charts, like time, volume, and period opens/closes, are generally excluded on point & figure charts. This leaves only the uncluttered purity of price action.

The point & figure chart is an older charting methodology, but one that is still very relevant and enjoying a resurgence in popularity. Point & figure excels primarily at identifying trend, support and resistance, breakouts, and chart patterns. Furthermore, one of the advantages that it enjoys over other charting methods is that is has a built-in method for helping to filter out market noise and false breakouts. Point & figure is well-suited to forex trading for a couple of reasons. First, the forex market is a 24-hour market. There is no need for daily opens or closes, as price is continuously streaming and active. Second, there is no central repository for market-wide volume in the forex market, so point & figure’s exclusion of volume and its concentration on price action are very suitable to forex trading.

Reading a point & figure chart is very different from reading a bar or candlestick chart, but it is also very straightforward once one gets used to it. A vertical column of stacked X’s is an upward movement. A vertical column of stacked O’s is a downward movement. Each column can only have either X’s or O’s, never both. There are two crucial filtering variables – box size and reversal amount. Box size is the amount of pips price must move in order to add another X on top of an X column or another O on the bottom of an O column. Reversal amount is the number of boxes that price must reverse by in order to start a new price column to the right, in the opposite direction. If the box size and reversal amount minimum thresholds are not met, the chart will not move – no X or O will be added to the chart, even as time progresses forward. New point & figure traders should experiment with what works best for them, but many forex traders may set the box size at 10 pips and the reversal amount at 3 boxes. The purpose of box size and reversal amount are to minimize market noise and concentrate on trend movement. One may increase the box size and/or reversal amount to eliminate additional noise.

Trading from a point & figure chart, like the EUR/USD chart shown above, generally involves a good amount of looking for breakouts. For example, whereas double and triple tops on bar/candlestick charts are usually thought of as reversal patterns, they are considered breakout patterns on point & figure charts. Below are some standard point & figure chart patterns that are used often to identify price action trading opportunities in the forex market:

There are some intricacies to learning how to use point & figure charts when trading forex, but these unique charts offer a whole new technical viewpoint to forex traders.

James Chen, CTA, CMT (bio)

- Click here for my book, Essentials of Foreign Exchange Trading (Wiley).
- Click here for my book, Essentials of Technical Analysis for Financial Markets (Wiley).
- Click here for my video DVD set, High-Probability Trend Following in the Forex Market (FXstreet).

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