Trend Lines On Point And Figure Charts
Similar to how we draw trendlines on any other price charts like line charts, bar charts, or candlesticks, in this unit, we will learn to draw a trendline on point & figure charts.
Trend lines play a very important role, if not an essential, part in Point and Figure analysis. With line and bar charts, trend lines show the line at which there is a constant rate of change. This is because line and bar charts show price versus time. The trend line on a bar chart therefore shows constant change in price per unit time.
With Point and Figure charts, however, there is no time. Instead, the x-axis shows the number of columns, which is the number of times the price has reversed. So, a trend line on a Point and Figure chart shows constant price change per reversal.
Rate of price rise per reversal.
Trend line breaks
In Point and Figure analysis, signals are generated by double-top and double-bottom signals in 3-box charts, and by catapults and semi-catapults in 1 -box charts.
They become important when assessing trend line breaks and the validity of the trend line. At point A in the Chart, the downtrend line from the top was breached, but there was no Point and Figure signal at the time. This allows the trend line to be continued through the data. There are many times the price touches the line (shown by the arrows), increasing its validity. The break at point B however, is accompanied by a semi-catapult buy signal, confirming the break.
Here are some guidelines for breaks of a downtrend: If, at the time the break occurs, there is also a double-top (or wider), a catapult or a semi catapult buy signal, as shown at point B in Chart, then the break is valid and should be acted on. The break at point A is invalid.
If, at the time of the break, there is no Point and Figure signal, look to see if one occurred just prior to the break. 'Just prior to' means that the signal must have occurred within an X or two of the trend line break. This still makes the break at point A an invalid break.
Left at point A we see two columns of Xs at the same height as the X at point A. If at point A another X had printed, there would have been a catapult breakout and that would have made the break of the trend line valid. In the case of Point A as it exists, this did not occur and it remains an invalid break.
