Investors of all stripes always seem on the lookout for new and better methods to figure out what their investments will do in the future. Short of a crystal ball, these tools hold the promise of showing investors what investments will do in the future based on their past performance.

One analysis type that has been around for years is the Point and Figure Chart. Although never at the top of analysis methods, and even less so today with all the high-tech tools available, the Point and Figure Chart forms the basis of many of the popular techniques used by technical analysts. More details from Trade Zero are available.

Building Point and Figure Charts

There’s a lot to be said about the daily noise over what happens with a stock. Unfortunately, with the cacophony of noise, there’s very little useful guidance over what will happen in the future. For this, it is crucial to understand how a stock performs in the long run. This is where the value of point and figure charts come in.

Opening and closing prices have long been the basis of analyzing stock performance. Unfortunately, this has little influence on stock performance. Instead, it is the unit price that determines price movement. Further, time has no bearing on price measurement, only the axis of the price.

Stock Price Movement

As stated previously, time has no bearing on point and figure chart analysis. Instead, it is the price axis that makes the difference. For this, the movement of stock prices is indicated by Xs and Os, with Xs reflecting rising stock prices, and Os showing falling prices. These appear only when a stock price moves at least one point up or down.

If, for example, a stock price moved up one point three times, it would be shown as a column of three Xs. On the other hand, if the stock’s price falls three points, there will be a column of three Os next to the Xs. There will never be a column that includes both Xs and Os.

How to Read a Point and Figure Chart

Now that we have established what makes up a point and figure chart, it is vital to understand how to read one. This is done by first understanding what most analysts consider the basis of stock price: the law of supply and demand, which says that when a stock is in lesser availability, the price will increase and visa vice.

An investor will lay out the Xs and Os that show price fluctuations. Next, an investor will determine at what level they believe prices will start to increase, called the support level. On the other end of the investing spectrum is the price at which the investor believes that the stock price will start to fall. This forms what is called the resistance level.

Summing it Up

The beauty of this methodology is of prime importance to the long-term investor. This has no bearing on short term investing methods. For long-term investors, however, the point and figure charting method hold a great deal of promise as an excellent method to determine overall price trends.  And while this method holds no value to short-term “day traders,” those investors who choose their stocks for the long run will find great value in this method of analysis.