The most basic Point and Figure (P&F) Chart patterns, and easiest to learn and start with, are a Double Top and a Double Bottom.
Double Top On A P&F Chart
A Double Top can be seen by having a column of X's followed by a pullback in prices, enough to add a 3 Box Reversal and draw 3 O's in the next column.
You would now have a staggered, or stair step looking chart. The X's would form a single top (let's use $25.00 in our example). When the pullback occurs, you would go to the next column to the right and drop down at least one box before adding the 3 O's (depending on how far prices actually closed lower). This would form the "staggered", or "stair step" appearance.
Next, prices reverse and begin to move higher again, enough to form a 3 box reversal again. You now add 3 X's on the chart, again, staggered, so you would begin at least 1 box higher from the low point of the column of O's.
Once prices move, and close, up to the high of the previous column of X's, at $25.00, you would now have a Double Top. A Typical entry on an up trending chart, or buy signal, would be given when prices closed up enough to add an additional X. This would represent a Breakout to the upside on a chart.
Double Bottom On A P&F Chart
A Double Bottom is just the opposite as described above, only reversing the X's and O's in the example.
A typical entry to go short on a down trending chart would be when the double bottom of O's occurs, and then prices close at least one box lower. This would be a breakdown, or breakout to the downside.
You'll notice I mentioned "up trending" and "down trending" above. Many people take a step back from the chart and look for the next larger degree trend to determine whether they want to look for potential buy signals or potential short signals.
If a market is trending higher, many look for a pullback, and then a breakout to the upside for the entry signal.
If a market is trending lower, they will look for a bounce and then the decline to resume. Once a breakdown to the downside occurs, that's their short signal.
These are just basic examples. In reality, the decision making process to choose an entry or exit point can be based on several indicators and requirements, although that doesn't mean a simple system can't be designed to produce profits.
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