The point and figure chart is the only method of charting, which was originated by traders, and is probably the oldest western method of charting prices around. The roots of the point and figure method date way back into trading lore, as it has been intimated that this method was successfully used by the legendary trader James R. Keene during the merger of US Steel in 1901. Mr. Keene was employed by Andrew Carnegie to distribute, as Carnegie refused to take stock as payment for his equity interest in the company. According to lore, Keene, using point and figure charting and tape reading, managed to promote the stock and get rid of Carnegies sizeable stake with out causing the price to crash. This simple method of charting has stood the test of time and requires less time to construct and maintain than the traditional "bar chart".

The Point and Figure Method derives its name from the fact that price is recorded using figures (X's and O's) to represent point….hence Point and Figure. Charles Dow, the original founder of the Wall Street Journal and the inventor of Stock Indexes, was rumored to be a point and figure user, and from personal experience the practice of Point and Figure charting is alive and well today on the floor of the Chicago Board of Trade. It is the methods simplicity in identifying price trends, support and resistance, and its ease of upkeep that has allowed this method to endure the test of time, even in the age of web pages, personal computers, and the information explosion.

Bar charts are two-dimensional charts, constructed with horizontal axis representing time and the vertical axis-representing price. The point and figure method is one dimensional, with only the vertical axis labeled, and it represents price and only price.

Bar charts use a basic measure of time as the representation of price, with one bar representing a pre determined unit (5 minutes, 1 day, 1 week, 1 month, etc.). The Point and Figure Method records price swings, not price versus time. As such, this method of charting allows the trader to encapsulate in one simple method the true concern for speculators- Price and probable price direction!

The Point and Figure Method also requires less upkeep than traditional charts, as the Point and Figure Method helps to "filter out" noise on the charts by only concerning itself with movements of a significant size. Unlike the traditional bar chart, which requires an update according to the calendar (daily, weekly or monthly), the Point and Figure chart only requires an update when justified by price.

Pattern Recognition is also simpler, and less subject to emotion using the Point and Figure Method. Common bar chart patterns, like the "Head and Shoulders" pattern require subjectivity, while Point and Figure patterns can be more easily identified, as only price swings are measured, not calendar movement as well as price. Because this method was developed by speculators, for use in speculation, this is the only method of charting which was developed entirely for speculation, and used strictly by speculators. As such, this method has not been borrowed from another field, or some new fangeled idea developed to generate book sales or commissions, but a time honored tradition in speculation.

Construction of a Point and Figure chart is very simple. Up movements of a certain magnitude are designated by an X on the chart, while down movements of a comparable magnitude are recorded by a series of O on a chart. In constructing Point and Figure Charts, Grainguide recommends using the 3 Box Reversal Method.

The first concept to understand is the BOX SIZE. The Box Size is the amount of price movement required to completely fill a Box or grid on the chart. For example, if charting Wheat, we would use a Box Size of 5 cents. Using this method, price swings less than 15 cents (three 5 cent boxes) in either direction are ignored, deemed irrelevant to the intermediate trader or hedger in deciding the trend of the market.

Following the recording of O on the chart at 250, the daily low is checked each day. If the daily low is less than 245, then another O would be recorded on the chart in the same column. However, if the daily low is greater than the next lower Box, the daily high is then checked to see if it is greater than the price 3 boxes higher (or 265 in this example). If the daily low is greater than 245 and the daily high is less than 265, then no notation is made on the chart. Whenever one is currently in a column of O's, the daily low is checked first for the update, and when a new notation is made, you are done for the day. However, if a new notation is not necessary to the downside, then the daily high is checked to see if a reversal notation can be made. The opposite rules apply when in a column of X's, with the daily high checked first, then if no notation is required, the daily low is checked. Once a new notation is made, all further price movement is ignored until the following day.

The true beauty of the Point and Figure Method lies in how well it identifies trends. The following are the basic definitions of a bull and bear trend:

Bull Trend: An upward trend in prices is defined as a series of HIGHER HIGHS and HIGHER LOWS

Bear Trend: A downward trend in prices is defined as a series of LOWER LOWS and LOWER HIGHS

Using the Point and Figure Method, the Trend can easily be identified. When the price of Wheat broke through 270 to the upside, a Bull Market began. This Bull Market would be considered into effect until prices broke through support at 250. After prices traded from 270 up to 285, they corrected back down to 270. The next rally carried prices up to 310, but when prices penetrated 285, the second time, the conservative trader could move his stop loss to 265, dramatically reducing his/her risk. This rally continued up to 310, then corrected back to 290. The next rally halted at 305, making a lower high! Conservative traders could move their stop loss to 285, while aggressive traders would have moved the stop loss to 290.

When prices penetrated 285 to the downside, a bearish trend had begun. This can easily be seen on the Point and Figure Chart as a lower HIGH (at 305) followed by a lower LOW (285 vs the previous low at 290). The initiation of the Bearish Trend at 285 may get traders to short this market at 285, with a predetermined stop loss at 305.

One of the major benefits to the point and figure method is that it portrays only the price swings, which the practitioner tells it too. If the box size is too small, then the Point and Figure Chart will not filter out the noise, while too large a filter will not present enough detail in the chart to make it useful.

Because the Grain markets have maximum tradeable daily limits, these are the filter or Box Size we feel are the most appropriate for the Grain markets, long term. The Long Term trend Charts are ideal patient traders, who are comfortable taking more risk for higher rewards. The larger box sizes identify the long term trend of the market.

The ease with which one can identify SUPPORT and RESISTANCE coupled with the fact that the Trend of the Market can always be identified using the Point and Figure Method are its two main benefits. Experience teaches us that most commodity traders lose money! Some of this is due to the fact that most commodity traders do not have a set plan in place for stop loss placement, and as such they tend to ride losers much to long. Using the Point and Figure Method, the trader can easily identify levels of support and resistance, and use those as stop loss points, identifying their risk with in reason.

Though Using the Point and Figure does not guarantee that the trader will be able to identify trends and make profitable trades, this method does instill some discipline into trading, and gives a basic premise to base decisions upon, which is something that many traders are lacking in their own trading.

Though using the Point and Figure Method does not guarantee success in your speculative endeavors, it should help by instilling discipline into your trading. The largest drawback to the Point and Figure Method is that it does not identify Extremes, historic price tendencies, or account for crowd psychology. These pitfalls manifest themselves in "false break-outs". As with any type of trend following system, this will be a problem. However, by using the Point and Figure Method in conjunction with other forms of analysis, and solid money management, one can spot opportunities when the "odds" favor a move in a certain direction and take advantage of them.

The true beauty of the Point and Figure Method is that conveys the importance of price so the speculator, be he traders or hedger, can clearly identify where prices have been, as well as the current trend of the market, allowing him/her to make assessments of the probable future direction. Like any method, it has its pitfalls. But, unlike so many of the recent fad methods promoting ease of use, this one stands on a long history of use by professional traders.