Point and Figure Charting in Wyckoff Analysis: Projecting Price Targets

Point and Figure (P&F) charting is a unique and effective method of technical analysis that predates even the work of Charles Dow. Richard D. Wyckoff, however, was one of the first to recognize its immense value in forecasting price movements and incorporated it as a key component of his analytical toolkit. This article will explore the principles of P&F charting and demonstrate how it is used within the Wyckoff framework to project price targets with a remarkable degree of accuracy.

The Philosophy of Point and Figure Charting

Unlike traditional bar charts or candlestick charts, which plot price against time, P&F charts are concerned only with price movement. Time is not a factor in the construction of a P&F chart. This makes P&F charts particularly effective at filtering out the “noise” of minor price fluctuations and revealing the underlying trend.

A P&F chart is composed of columns of X’s and O’s. A column of X’s represents a rising price, while a column of O’s represents a falling price. A new column is only created when the price reverses by a predetermined amount, known as the “box size.”

Key Concepts in Point and Figure Charting:

• Box Size: The minimum price movement required to add a new X or O to the chart. The box size can be a fixed amount (e.g., $1) or a percentage of the price.
• Reversal Amount: The number of boxes the price must move in the opposite direction to warrant a new column. The most common reversal amount is 3 boxes.
• Support and Resistance: P&F charts provide a clear and unambiguous picture of support and resistance levels. A horizontal row of O’s represents a support level, while a horizontal row of X’s represents a resistance level.
• Trendlines: P&F trendlines are drawn at 45-degree angles. A bullish trendline is drawn below a series of higher lows, while a bearish trendline is drawn above a series of lower highs.

The Wyckoff Method and Point and Figure Charting

Wyckoff used P&F charts for two primary purposes: to identify trading ranges (causes) and to project the extent of the subsequent trends (effects). The horizontal dimension of a P&F trading range represents the cause, and the vertical dimension represents the effect.

The Horizontal Count: Measuring the Cause

The horizontal count is the number of columns in a P&F trading range. This count represents the amount of accumulation or distribution that has taken place. The wider the trading range, the greater the cause, and the larger the potential for the subsequent trend.

To take a horizontal count, a trader simply counts the number of columns in the trading range. This count is then used in a formula to project the price target.

The Vertical Count: Projecting the Effect

The vertical count is the projected price movement based on the horizontal count. The formula for the vertical count is:

Price Objective = (Horizontal Count * Box Size * Reversal Amount) + Base Price

A Practical Example

Let’s assume a stock has been trading in a range between $40 and $50. We are using a box size of $1 and a 3-box reversal. The P&F chart shows a trading range with a horizontal count of 15 columns. The low of the trading range is $42.

Using the formula above, we can project the price target for the subsequent markup phase:

Price Objective = (15 * $1 * 3) + $42 = $87

This projection provides a concrete target for the trader and helps to manage the trade effectively.

The Importance of Confirmation

While P&F charts are a effective tool for projecting price targets, it is important to remember that they are not infallible. A Wyckoff trader will always look for confirmation from other indicators and from the price action itself. For example, a breakout from a P&F trading range should be accompanied by an increase in volume. A failure to see this confirmation may be a sign that the breakout is false.

Conclusion

Point and Figure charting is an indispensable tool for the serious Wyckoff trader. It provides a clear and logical method for identifying trading ranges, projecting price targets, and managing risk. By mastering the art of P&F charting, a trader can gain a significant edge in the market and improve their ability to profit from the market’s most effective trends.

References

[1] Dorsey, T. J. (2007). Point and Figure Charting: The Essential Application for Forecasting and Tracking Market Prices. John Wiley & Sons.

[2] De Villiers, V. (1933). The Point and Figure Method of Anticipating Stock Price Movements. Stock Market Publications.