In this article I will demonstrate how Point and Figure charts may be used to trade the Forex market successfully. To understand the strategy, I suggest that you read the Point and Figure tutorial first.
The following examples show the current chart of EURUSD and how you could have traded it. The setup of the Point and Figure chart is reversal = 3 and box size = 50 pips. The whole chart covers a range of about 100 trading days.
I will show you, how you could have made some nice profits of 8,250 pips or $82,500 if we would have traded 1 standard lot ($100,000) per position, in 4-5 months!
The black and red numbers and lines on the chart represent buying points and selling points as well as the inital stop loss (and trailing stops). The black lines and numbers are the entry signals and the red lines and numbers being the stop loss levels.
(Click on image to zoom)
I will explain how to read the example charts once in detail. The other pictures are self-explanatory when you have understood the method.
You can see the 45 degree bearish resistance line starting @1.4900 on the highest columns of X’s on the left hand side of the chart. This indicates, that we are in an downtrend and looking for opportunities to short the market, to sell.
- Our first simple sell signal has been triggered at #1 @1.4250 (black line), the break of a double bottom, and we open or short position. The initial stop loss is set 2 boxes above the last column of X’s @1.5000 (#1, red line).
- The next signal (#2) is another break of a double bottom @1.3650, we open another position, setting the initial stop loss two boxes above the last columns of X, @1.4050. The stop loss of our first position will also be set to the same level. From now on, our profits from position #1 are backed.
- We have not been stopped out so far. There has been another sell signal between point #2 and point #3, but the price was nearly the same as the one from our first position, so we don’t open a new one, though we could have. But I prefer some distance between two positions. So the next sell signal is at black line #3 @1.3450, initial stop loss set to red line #3 @1.3900. The stop losses of our previous two positions we’re holding will also be trailed to 1.3900.
- Sell signal #4 is a break of a tripple bottom @1.2700, initial stop loss @1.3050, but could also been set two boxes higher @1.3150, if you’re more risk averse. All stop losses of our previous positions are also set to 1.3050. This means, the profits of positions #1-#3 are already backed.
- Our last position is opened at line #5 @1.2450, we set the initial stop loss to 1.2900 (red line #5). Every other stop loss is also set to 1.2900.
- Price does not fall anymore but raises and all our positions are stopped out at our stop loss level that we have set before @1.2900.
This is the profit for each position we have traded all the way down:
- Opened @1.4250, Closed @1.2900 – Profit: 1,350 pips
- Opened @1.3650, Closed @1.2900 – Profit: 750 pips
- Opened @1.3450, Closed @1.2900 – Profit: 550 pips
- Opened @1.2700, Closed @1.2900 – Loss: 200 pips
- Opened @1.2450, Closed @1.2900 – Loss: 450 pips
This would result in a total of 1,350 + 750 + 500 – 200 – 450 =
1,950 pips or $19,500
if we had used a standard lot per position. The time that hast passed between the first signal and being stopped out was about 20 trading days, so 1 month. A $19,500 profit in 1 month is very nice, isn’t it?
If we had put the stop loss closer to our entry points, like directly on top of the last column of X’s and not two boxes above, we could have made another 100 pips more on each winning and 100 pips less on each losing position, which would have resulted in a total of 2,500 pips or $25,000 in 1 month!
You could say: but then the risk of being stopped out is bigger. But you could also say: after I already have 3 open positions, I want a tighter stop loss to save more of my already made profits and if I get stopped out, so shall it be.
But non the less, the profits made are really overwhelming.
(Click on image to zoom)
In the next example, the bearish support line has already been broken and a bullish support line has been plotted. So we are looking for buy signals, going long in the market.
I won’t explain the method as detailed as in example 1, as you should already have understood the concept behind that system. So here’s only the calculation of the profit per position:
- Opened @1.2900, Closed @ 1.4550 – Profit: 1,650 pips
- Opened @1.3050, Closed @1.4550 – Profit: 1,500 pips
- Opened @1.3500, Closed @1.4550 – Profit: 1,050 pips
- We haven’t opened a new position, but we close all of our positions at red line #4.
Why? The market made a rise of ~2.200 pips without any considerable retrace or consolidation. This is the first warning signal. And the second is the last big rally of 1.450 pips – that’s 29 boxes without a reversal. This is a so called long tail pattern. The first reversal after a rise of at least 20 boxes indicates a sell signal. At this point we would have closed all of our positions.
Total Profit: 4,200 pips or $42,000 in 8 trading days – that’s less than 2 weeks!
(Click on image to zoom)
The story continues. We are in an downtrend again, you can see the bearish resistance line once again. The reversal after the long tail triggered our first sell signal:
- Opened @1.4550, Closed @1.3150 – Profit: 1,400 pips
- Opened @1.3900, Closed @1.3150 – Profit: 750 pips
- Opened @1.3500, closed @1.3150 – Profit: 350 pips
- Opened @1.3100, Closed @1.3150 – Loss: 50 pips
- Opened @1.2800, Closed @1.3150 – Loss: 350 pips
That’s a total of 2,100 pips / $21,000 in 23 trading days, or 1 month.
This example has shown, how easy it can be to identify the current market trend, simply by using bullish and bearish resistance lines, using simple Point and Figure chart patterns to trade the Forex market profitable.
If you’ve read the Point and Figure Tutorial you know by now, that it’s very simple to draw a Point and Figure Chart by hand. It doesn’t even take a minute to update the chart with end of day data of the market of your choice. Another option would be, that you get the Point and Figure indicator for MetaTrader 4, that I have developed.
Just imagine how much your trading skill would benefit from this easy and simple charting method.