Point and Figure (P&F) charts, a prominent member of the noiseless charting family, have been extensively covered in our previous newsletters. Traditionally, this charting method is favored for investing or positional trading. However, by adjusting the box size, P&F charts can also be effectively utilized for swing trading.

In today's newsletter, part of our ongoing mini-series on Swing Trading, we’ll explore how traders can leverage P&F charts to identify and execute swing trades. Our focus will be on understanding a key participating pattern: the Double-Top Buy (DTB).

Double-Top-Buy: The P&F swing pattern

The Double Top Breakout (DTB) is the most fundamental pattern in Point & Figure (P&F) charts, representing a swing breakout. To grasp the concept of DTB, it's essential to first understand how P&F charts are constructed.

In P&F charts, price movements are displayed in the form of columns. An upward price movement is represented by "X," while a downward price movement is denoted by "O." When the price rises without reversing, consecutive "X"s are stacked vertically to form a column of Xs. Similarly, a column of Os is formed when the price declines continuously.

P&F charts typically use a 3-box reversal setting. This means the chart switches from a column of Xs to Os or from Os to Xs only when the price reverses by a magnitude equivalent to three times the box size. This is referred to as a column reversal. For instance, if the box size is set at 1%, a column reversal will occur when the price moves in the opposite direction by 3% (3 × 1%). When such a reversal happens, the new column is plotted adjacent to the previous one.

The Double Top Breakout (DTB) is a bullish pattern that signifies a swing breakout. It indicates that the price was in an uptrend, followed by a pullback, and then resumed its upward movement, breaking above the high of the previous column of Xs. As shown in the image below, this pattern is represented by a column of Xs, followed by a column of Os, and then another column of Xs that surpasses the previous column of Xs' high.

Using DTB for swing trading

Previously, we discussed that the box size on Point & Figure (P&F) charts can be adjusted to better suit specific trading styles, such as swing trading. For swing trading using P&F charts on a daily timeframe, a box size of 0.25% is typically used.

A swing trade setup on a P&F chart would resemble the following:

1. Shortlist Fundamentally Strong Stocks
   Start by identifying stocks with robust fundamentals.

2. Check Relative Performance
   Check whether the stock is relatively outperforming the benchmark on 1% (Daily timeframe) box size

3. Confirm the Trend with 20-period EMA line
   Incorporate a 20-period EMA line into the P&F charts with 1% and 0.25% box sizes on the daily timeframe to refine the analysis.

   • A bullish trend is indicated if the price is trading above the EMA channel on both charts.

   • Confirm that the price consistently stays above the EMA channel on both timeframes to validate the stock's larger bullish trend.

4. Participate at the Double-top-Buy
   Place your trade when the price forms a DTB above the EMA channel. That is, participate at the first brick above the high of the previous column of X

5. Set a Stop Loss
   Set the low of the column of O as your stop loss.

Take a look at the charts of BEL, MCX, and ABREL below. The highlighted boxes indicate the Double Top Buy (DTB) pattern, with the price trading above the EMA line, confirming a bullish trend. These setups presented potential opportunities for swing trades, allowing traders to participate in these stocks at the point of the DTB pattern as discussed earlier.

DTB is just one of the basic patterns of Point and Figure charts. These charts are versatile and efficient in reducing the noise in the markets. If this newsletter intrigued you in anyway about Point and Figure charts, I recommend you check out my course on this charting technique How To Trade Point & Figure. This course explores Point and Figure charts in depth and deals with majority of aspects.

If you are new to trading and curious about P&F charts, the TNT One membership could be a great starting point. It grants you access to all current and upcoming courses, providing valuable insights and practical strategies to enhance your trading journey.

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