Trading

Education

Price without Time

(This is the 12th in a series of articles on basic technical analysis originally published in Futures magazine.)

All of the technical analysis associated with charts (bar, candlestick, chart patterns, gaps, etc.) and indicators (moving averages, MACD, etc.) covered so far in this series have required a time element. Whether it was one minute, one day or one week, the bar representing that period had an opening time and price, a closing time and price and a high and low that applied to that period only.

Time has always been a critical factor in charting, especially for W.D. Gann fans who believe time is as important as price. However, in a world that is going quickly to 24-hour, around-the-clock trading, there may be a day soon when traditional charts based on prices for a specific time period will not be useful. There is confusion already about whether data is “day-session only” or includes both day and overnight sessions. Exchanges have typically provided brief trading halts and designated specific times as the open and close of a “day,” and data sources such as eSignal break up a day into any time interval to produce charts. Everything involves a time increment.

Point-and-figure (P&F) charts, on the other hand, focus only on price and do not have a time element. Whereas traditional bar chart analysts try to determine if a one-minute or three-minute chart is better, for example, the P&F analyst ignores time but has to determine two other crucial factors: The size of the “box” and how many boxes to include in a “reversal.” The box is a price increment that can vary, depending on how closely you want to track the market.

This chart of S&P futures uses 25 points as a box size. The number of boxes for a reversal is typically 2 or 3 or, in this case, 50 points. As long as prices are going up, an X is added to the top of the X column every time the price is 25 points higher than the previous X. When the market turns down and reverses by 50 points or more from the top X, a column of Os is started to the right of the column of Xs and 1 box below the top X. For every 25-point decline, a new O is added to the bottom of the O column. If the market moves up by 50 points or more from the bottom O, a new column of Xs begins to the right of the column of Os and 1 box up from the bottom and so on.

If you want a longer-term view, you might make each box 50 points with a reversal of 3 boxes or 150 points. If you want to day trade, you might make each box 4 ticks or 1 point with a 3-box reversal equaling 3 points. The longer-term chart might give you 1 column of Xs or Os in a month; the short-term view might give you 2 columns or 40 columns of Xs and Os in a day, depending on how actively the market is gyrating. In markets such as the E-mini stock indices, using ticks might produce several screens full of up and down lines representing X and O columns during a trading day. Fortunately, technical analysis software can do these calculations on the fly today; otherwise, it would be a challenge to keep up.

Just as with bar charts, there are a number of ways to trade using P&F charts. A typical method is to trade a breakout of a previous column or, preferably, multiple columns. For example, with the market going from 1500 down to 800 and then back up to 1500, the first sell would have been on a stop at 1400. You would have then added when the price dropped below the previous columns of Os at 1250, 1175 and 975, depending on the size of your account and how aggressive you wanted to be.

To exit the position, you would have bought the breakout of the downtrend channel at 925, or, if you prefer not to use trendline analysis, you would have bought at 1225 when the columns of Xs exceeded 4 previous columns of Xs. One advantage of this approach is that you can get precise prices to enter and exit trades.

As with any charting method, P&F requires some experience and judgment to implement positions and stops successfully. It won’t totally eliminate the time factor; there will be times of the day when markets are too thin to trade safely just as there are today, but P&F charts may be the answer for the trading “day” of tomorrow.

Previous article: Shedding Some Light on Prices