TRADING FOREX. with POINT & FIGURE

Transcription

1 TRADING FOREX with 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.

2 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 commissioned Naval officer assigned to duty at Pearl Harbor, Territory of Hawaii. Hawaii was not yet a state. During my college 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 wasn t 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 broker s office at five in the morning. There was just one problem. It s hard to believe, in today s hi-tech world, but in those days there was only one way to get a stock quotation: from a blackboard on my broker s 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. That s 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. It s still around and can be found here: If you Google point and figure you ll find a number of other sites as well. Point and figure is really pretty simple to construct. Draw X s when prices go up and O s when their going down. What gets a little more difficult is trying to select the size of the boxes and when to select a reversal point. I ve always used a three box reversal but I ve seen traders use 2 and even five box reversals. Page 2

3 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 doesn t 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 what s 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 when used in a choppy market. In a trending market it simply moves straight up or straight down. There s no way to tell how far it might go. Page 3

4 Here s what it looks like with trendlines drawn in. And here s what it looks like on a P&F chart.

5 Now, let s get back to what we re 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 I m 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. Here s a good example of this on a video I made awhile back to demonstrate P&F: On a five minute chart I might use a four pip box like you can see in this video: But again, I ll 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 I m 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 it s much easier to see the highs and lows of the swings. On the next page you ll see what I mean. When prices are moving towards the next price level I don t draw an X or O until they actually cross that level. Page 5

6 For example, prices climb to 3995 but don t reach The highest box I would mark would be I also don t 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 don t 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. I ve never had much luck doing that. By the time I ve recognized a pattern I ve 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. Page 6

7 Here, for example, you can see how the indicators compliment each other. The moving averages cross over, the MACD bars, along with the candlesticks, change color. The candlesticks 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. I simply used the one day P&F chart as prices declined to keep me focused while writing. Page 7

8 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. Let me show you exactly how I construct a point and figure chart from scratch: Lastly, 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 you ll just lose more if you don t! Here are some additional P&F videos. On the next page I ve reproduced the daily point and figure chart displayed each day at our Membership Site. This chart is drawn automatically by our popular Indicator Package seen in many of my videos. It can be adjusted for any time frame Go here to learn more: I ve also included a copy of a blank P&F chart on the last page which you can copy and use if you don t have any graph paper. Page 8

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