P&F trend lines
The P&F trend lines are perfect for beginners. They are very easy to draw. They can also be drawn automatically if you use a service like https://www.pointandfigure.com. Usually when traders try to draw trend lines in candlestick charts, the result is not good. It is very difficult to find true trend lines that will be respected for longer periods of time. Usually the trend lines in candlestick charts are only good in hindsight. It is easy to draw a straight line through two or three points in a historical chart, but when you try to do it live and extend it into the future the result is almost always bad. This is something that most beginners have experienced, and the truth is that even experienced traders struggle with drawing meaningful trend lines in candlestick charts. Luckily there is an alternative to candlestick charts.
That is point and figure charts.
In point and figure, “P&F”, trend lines are interestingly enough always drawn at the same angle. The trend lines are drawn at 45 degrees upwards for up trends. And at 135 degrees downwards for down trends. That is because P&F charts are plotted in a grid, just like graph papers with fine lines making up a regular grid, often found in notebooks. If you imagine drawing a line diagonally, right through the middle of the cells in the grid. You draw the line from the bottom left corner of every cell in the grid, through the top right corner of every cell in the grid, diagonally upwards. Now you know exactly how to draw 100% correct trend lines in point and figure! When you have drawn a trend line in the P&F chart you will notice that this trend line will stay intact for a long period of time. Typically the price will respect the trend line and often reverse before even touching, or even getting very close to the trend line. That is in fact perfect and the way it is supposed to be.
This means that the price is trending strongly and not even getting close to breaking the trend line. This in turn means that you are likely to find a strong trend and stay confident in that trend for a longer period of time - unlike with the failed trend lines you have in candlestick charts. Luckily the P&F charts are good alternatives to candlestick charts. If you look at a P&F chart you will understand why the trend lines are drawn in the 45 or 135 degree angles.
The Point and Figure reversals form new columns that are usually successively higher in up trends and successively lower in down trends. As long as you have a series of higher lows you will be in an uptrend and the bullish trend line will be intact. If you have a series of lower highs then you will have a down trend that will stay below the 135 degree bearish trend line. The Point and Figure charts are drawn using a set of simple characters. The P&F trend lines are usually drawn as the plus character: + instead of a continuous line that you are used to in candlestick charts.
The reason for this is that when traders centuries ago drew point and figure charts manually it was cleaner and easier to use the plus sign instead of trying to add small pieces to a straight line. Modern Point and Figure charts follow the same traditional way of drawing the P&F trend lines.
Likewise, the short term movement upwards in the P&F chart are still today drawn as X’s and short term movement downwards are drawn as O’s.
