Combining Trading Price Point-and-Figure Techniques with Other Indicators
The innate simplicity of trading price point-and-figure (P&F) charting is appealing, but you can add value to decision making by speeding up the buy/sell signal or seeking confirmation or lack of confirmation from other indicators.
Here’s how you can use point-and-figure charting along with other indicators:
Moving averages: You use the price at the center of each column in calculating a moving average in P&F charts, instead of using the usual method of averaging prices over a fixed number of periods. Thus you’re using the average price per reversal. If the moving average shows that you had a downtrend and now you get a new column of Xs that rises over the moving average, you have more confidence that the Xs really do imply a rising trend and thus a safer buy signal.
Parabolic stop-and-reverse indicator: The parabolic stop-and-reverse (SAR) indicator delivers a speedier reversal than waiting for a new column of Xs or Os. The parabolic SAR has the advantage of tightening your stop while the momentum of a price move decelerates.
Bollinger bands: Data displayed in the P&F format can’t display momentum and thus overbought or oversold, a shortcoming that can be partly addressed by applying Bollinger bands. If your columns of Xs persist in pressing against the top of the band and sometimes breaking it, you have confirmation of the uptrend. When the next column of Os crosses the centerline (a simple moving average) to the downside, you expect a swing all the way to the bottom band.
Bollinger bands are wide apart when volatility is high, and they squeeze narrower as volatility dissipates and prices become congested. In a congestion, P&F prices are in a series of short columns that you can’t trust to deliver a reliable buy-or-sell signal. When you see the short columns together with the narrow Bollinger band, you can guess that the market is fickle — it’s not trending, and you should go find something else to trade.