Plus: The trading ‘Bible’ that’ll show you how to make powerful charts with simple noughts-and-crosses
I’ve got a bit of a battle on my hands at the moment…
And to be honest, I don’t know whether I’m making a big deal of things.
It’s probably just a sign of the times we live in.
But I just cannot get Luke (my eldest boy) to take an interest in reading books. At the minute, he’s far too busy with a computer game called Minecraft. He’s almost addicted to the thing!
It’s not a case of being behind at school or anything. He’ll do the reading they set for his homework no problem. But try and encourage him to explore his own choice of books and I get a blank stare. “But reading’s boring, Dad”.
Is this normal behaviour these days? Am I being ‘un-cool’ by trying to keep him off the games?
You know, even though I’ve spent most of the last decade staring at a computer screen, doing anything digital – outside of trading – gives me a weird empty feeling.
When it’s time to kick-back and relax, computers and gadgets leave me cold. I’d much rather immerse myself in a good book. So I suppose there is a case for me trying to impose my own preferences on Luke.
And I can even see the benefits of Kindles and Ipads – honestly I can – It’s just that for me, nothing competes with holding a real book in my hands.
I love the smell and feel of the paper. The swishing of the pages as I turn them, and the ability to scrawl a quick note in the margin.
And I’m absolutely convinced I understand and memorise things much better if I physically write notes with a pencil or pen.
I even did one of those psychometric tests once that confirmed what I already suspected: my most effective way of processing data is to have it printed out and spread around the desk in front of me.
So if you are like me, is there a way to get a trading edge by building this primal hand-brain connection into your market analysis?
I think there is.
I think there’s a lot to be gained by keeping a set of charts – on paper – that you update with a pencil at the end of the trading day.
I’m not talking about bar charts, candlestick charts or line charts. I’m going to show you something more powerful to use.
If you can draw the charts I’m about to show you, they’ll give you a new perspective on the markets. And it’s made doubly effective by that primal hand-to-brain thing.
They’re called Point and Figure charts. And at first glance, they look like a game of noughts and crosses gone horribly wrong.
I used to update P&F charts by hand on graph paper – in real-time – back when I was scalping the Bond Futures. It was a ‘total immersion’ experience. There was no opportunity for your mind to wander off – you had to be totally focused on the price the market was about to print.
If you’ve not seen them before… here’s why I think you should take a closer look at Point & Figure charts for your end-of-day manual updates:
P&F is easy to understand. Just learn a few basics and you’re away
P&F charts are simple and quick to maintain. Update charts for all 8 major Forex pairs – using freely available end-of-day data – in about five minutes.
They eliminate noise and focus on price action. Dodge any distractions and cut straight to the important market activity
They give you precise decision making rules for placing your trades. P&F is a method of analysis but also has trading systems built-in.
They never miss a major move. As long as you take each signal, you’ll never miss a biggie ever again.
They clearly highlight areas of support, resistance, and congestion. P&F can help you manage your existing trades no matter how you entered them.
So what exactly are Point and Figure charts?
Here’s how investopedia.com describes them:
“[Point and Figure is] a chart that plots day-to-day price movements without taking into consideration the passage of time. Point and figure charts are composed of a number of columns that either consist of a series of stacked X’s or O’s. A column of X’s is used to illustrate a rising price, while O’s represent a falling price. As you can see from the chart below, this type of chart is used to filter out non-significant price movements, and enables the trader to easily determine critical support and resistance levels. Traders will place orders when the price moves beyond identified support/resistance levels.
Additional points are added to the chart once the price changes by more than a predefined amount (known as the box size). For example, if the box size is set to equal $1 and the price of the asset is $15, then another X will be added to the stack of Xs once the price surpasses $16. Each column consists of only one letter (either X or O) – never both. New columns are placed to the right of the previous column and are only added once the price changes direction by more than a predefined reversal amount.”
I’ve marked up a GBP/USD chart here so you can get an idea of what P&F can show you. This is exactly the kind of thing you can get going for yourself on an end-of-day basis:
GBP/USD Point & Figure – (100pip box-size, 3 box reversal)
A: Clear support level
B: Sell signal on break of support
C: Down-trend line offers resistance.
D: Another clear support level
E: Another sell signal on break of support
You can have a look here for an overview of how to construct the charts. They use Stock prices in their examples but the principle is exactly the same whether it’s Stocks, Currencies or Commodities.
If I’ve tickled your interest and you want to go deeper with Point & Figure, I’ve also got a good book on stand-by here for you…
Heinricht Weber & Kermit Zieg
Like I mentioned, we’re staying with the Point and Figure theme for this week’s recommended reading.
This is an all encompassing guide to the Point and Figure technique. It’ll show you how to draw the P&F charts and how to interpret them.
There’s a good section on specific trading applications, including: how to measure moves to give profit targets, how to use P&F for day-trading, and how to use P&F to show you where to scale-in to your position.
There’s an overview of two different historical studies into the profitability of the method and a section on tweaking and optimising the charts.
If you’re interested in exploring Point and Figure further, this is one for your trading bookshelf.
Be Prepared: Market Moving Data Coming This Week (London Time – BST)
Last week’s big numbers didn’t really cause any sensations. The Fed’s statement was pretty low-key and there was a little bit of a fuss made over the US job number consisting of a lot of part-time workers.
Here’s what we’ve got coming this week:
Tuesday 6th August:
09:30 UK Industrial Production (GBP)
13:30 US International Trade (USD)
Thursday 8th August:
13:30 US Initial Jobless Claims (USD)
Not much going on with scheduled economic numbers again this week… but you never know what else might get things moving!
I hope you enjoyed what we’ve looked at this week. Let me know what you think of the Point & Figure charting. Have you used it before?