Point and Figure (P&F) charting is a time-honored technique in technical analysis, emphasizing price movements while filtering out minor market fluctuations. This method is particularly adept at identifying significant patterns such as triple tops and triple bottoms, which signal potential bullish or bearish reversals in stocks and ETFs.
Understanding Triple Tops and Bottoms in P&F Charts
A triple top buy signal materializes when a column of Xs surpasses the peaks of two preceding X columns, indicating that buyers have overcome resistance after two prior unsuccessful attempts.
Conversely, a triple bottom sell signal occurs when a column of Os drops below the troughs of two preceding O columns, suggesting that sellers have overpowered support after two prior unsuccessful attempts. These formations typically require at least five columns to develop, and their breakouts often lead to substantial price movements due to the extended consolidation period.
Point and Figure triple tops and bottoms are not the same as those found in traditional bar or candlestick charts
It’s important to note that Point and Figure triple tops and bottoms are not the same as those found in traditional bar or candlestick charts. In conventional charting, a triple top or bottom forms when the price touches a support or resistance level three times without breaking through.
However, P&F charts focus solely on price movement and disregard time, which means these patterns emerge from a different logic. In P&F charts, the emphasis is on the number of times a price level is tested and subsequently broken, providing a clearer and often more decisive signal when the breakout occurs. This price-centric focus can make P&F triple tops and bottoms more reliable in identifying major breakouts, as they filter out insignificant price noise caused by time-based fluctuations.
Optimal Settings for Detecting Triple Tops and Bottoms
The effectiveness of P&F charts in identifying these patterns hinges on the selection of box size and reversal amount:
- Box Size: This parameter determines the price increment represented by each box on the chart. Larger box sizes can filter out insignificant price movements, highlighting more substantial trends, while smaller box sizes capture finer price details but may introduce noise. It’s advisable to adjust the box size based on the asset’s volatility; more volatile stocks or ETFs may require larger box sizes to effectively filter out minor price fluctuations. Commonly used box size settings include:
- For stocks priced under $5: 0.10 or 0.25 box size
- For stocks priced between $5 and $20: 0.50 box size
- For stocks priced above $20: 1.00 box size
- Percentage-based box sizes (e.g., 1% or 2%) are also popular for adjusting dynamically to the asset’s price level.
- Reversal Amount: This setting dictates the number of boxes required to indicate a trend reversal and initiate a new column. A standard practice is to use a three-box reversal, which balances sensitivity and reliability in trend detection. This means that a price movement must reverse by at least three box sizes to warrant a shift from a column of Xs to Os, or vice versa.Typical reversal settings include:
- 1-box reversal for highly sensitive, short-term analysis
- 3-box reversal for balanced, medium-term analysis (most widely used)
- 5-box reversal for long-term, major trend analysis
NOTE: AIQ Reports and AIQ Charts utilize these most common settings for Point & Figure.
Empirical Support for Optimal Settings
The research underscores the efficacy of these settings. For instance, studies have demonstrated that double-top and double-bottom patterns, which are foundational to triple formations, exhibit high profitability rates. Robert Earl Davis found double tops to be profitable 80.3% of the time and double bottoms 82.1% of the time. Additionally, John Anderson’s study reported a combined profitability for these patterns, ranking them among the top-performing formations.
AIQ Reports Point & Figure Breakout
Point & Figure Upside Breakout Report 2-27-25
Chart of YUM with regular price chart at 2-27-25 and Point & Figure Chart breakout below.
Point & Figure Downside Breakout Report 2-27-25
Chart of DXC with regular price chart at 2-27-25 and Point & Figure Chart breakout below.
Conclusion
In summary, to effectively identify triple top and bottom patterns in stocks and ETFs using end-of-day P&F charts, a three-box reversal setting is generally recommended. Additionally, understanding the distinction between P&F and traditional chart patterns is essential, as the price-centric nature of P&F charts often results in more decisive and actionable breakout signals.
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