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"Point And Figure" Trading Explained For Beginners (Supply And Demand Trading Course) - YouTube
Channel: The Secret Mindset
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Hello and welcome.
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Today we'll look at the point and figure chart,
we'll cover its features, as well as discuss
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how they're useful to day trading, scalping
and swing trading and weâll also see how
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to spot supply and demand zones using this
type of analysis.
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So if you could⊠like, subscribe to the
channel and stick around for the full video.
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Here we have a chart showing data from past
24 hours.
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On the right we have a classic candlestick
chart and on the left a point and figure chart.
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Both charts are showing the same thing, the
display is different.
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The candlestick chart displays the price as
the linear function of time, shows how the
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market behaved during certain periods of time,
in this example 1 trading day.
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But the problem is that sometimes, you donât
need to know how price changed in time, all
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you needs is to know is what the prevailing
force on the market is at the moment â demand
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or supply.
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That is where P&F charts come handy.
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They show the price changes graphically, independently
on the time during which the changes have
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occurred.
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Here we have 5 days of price action.
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Point and figure charts provide a simple,
yet disciplined method of identifying current
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or emerging trends in prices.
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They rely only on price movements and not
time intervals during the creation of the
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chart.
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In this way, these charts are similar to Renko.
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So Point and Figure charting reduces the importance
of time on a chart and instead focuses on
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price movements.
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These charts are also excellent at filtering
the non-moving days.
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Point and Figure charts map out the relationship
between supply (created by sellers) and demand
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(created by buyers) at different price levels.
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When demand exceeds supply (more buyers than
sellers), prices rise and this is reflected
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by a column of Xs on the chart.
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Conversely, when supply exceeds demand, (more
sellers than buyers) prices fall and this
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is reflected by a column of Os on the chart.
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The objective of a Point and Figure chart
is to identify the points at which established
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supply/demand relationships change (these
are known as breakouts).
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These changes will very probably lead to a
future significant move in the price.
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The green X's are the price increases and
the red O's are the price decreases.
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A column of X's represent an uptrend, while
the column of O's represents a downtrend.
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In each particular column, there can be only
X's or O's.
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When one trend ends, a new column starts.
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So, X columns represent rising prices, while
columns consisting of O's denote falling prices.
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There are two inputs to a Point and Figure
chart: Box size and Reversal amount.
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The X's and O's that make up each column occupy
a space called the Box Size.
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The box size is the size of movement required
to add an X or an O.
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The box size value is determined by each trader.
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When price moves enough in the same direction
as the current column, a new X or O is added
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to that column.
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When price closes far enough away in the opposite
direction, a new column begins with either
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an X or an O (the opposite of the previous
column).
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The amount that price must move is determined
by the reversal distance.
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This value is created by multiplying the box
size by another value defined by the trader,
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the Reversal Amount.
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The reversal amount is the number of boxes
price must move in order for a new letter
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to be drawn or a new column to be created.
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Therefore if the box size is set to 1 ($1)
and the reversal amount is set to 3, then
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price must move $3 in order for a new letter
to be added to the chart.
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There are two different methods for calculating
reversal distance:
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First is the Average True Range (ATR).
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This method uses the values generated by the
Average True Range (ATR) indicator.
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The ATR is used to filter out the normal noise
or volatility of a financial instrument.
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It calculates what the ATR value would be
in a regular candlestick chart and then makes
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this value the reversal distance.
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The second method is the box size.
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New boxes are only created when price movement
is larger than the pre-determined reversal
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amount.
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The upside to this method is that it is very
straightforward and it is easy to anticipate
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when and where new boxes will form.
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The downside is that selecting the correct
box size for a specific instrument will take
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some back test.
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I wish I had the perfect box size that will
work on any market, but this isnât the case.
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We all have to backtest and find the right
size for out trading style.
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Here are some tips regarding how to set the
correct size of the box, if youâre not using
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the ATR method.
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So the box size is based on the scale you
wish to use for a particular market and it
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represents the value given to each box (X
or O) on the chart.
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Itâs the minimum price change needed to
continue the trendâmeaning to add an X to
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the top of the column of Xâs (or the minimum
price decrease needed to add an O to the bottom
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of a column of Oâs).
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The reason that this is an issue is because
a reversal of $3 for a $10 stock is more dramatic,
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on a different scale, than a $3 reversal on
a $100 stock.
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Furthermore, since point and figure charts
are used to filter out ânoiseâ in the
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market, you will want to be sure that you
are filtering out just enough to eliminate
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momentary price reversals, yet at the same
time, you can identify when a significant
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reversal is taking place.
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As you use point and figure charts, you may
find that different box sizes work better
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for your trading style or for a particular
market.
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I donât use the ATR method, because I prefer
to have full control, so I set the box size
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manually, depending on the market Iâm trading.
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For Forex, box sizes of 10 or 20 pips are
a good start to backtest.
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For stocks valued between 20 dollars to 100
dollars, I use a 1 dollar box.
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For stocks above 100 dollars I use a 2 dollar
box.
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If you trade penny stocks, use 50 cents or
25 cents boxes.
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These are just a good starting point.
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You can adjust the box size depending on the
market youâre trading and your trading style.
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Now, another important aspect to consider.
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Old school traders typically prefer the high
and low prices for the period, while others
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may focus strictly on a single price such
as the close.
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Depending on the price(s) you use, you may
get different results.
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There are two rules regarding the letters
and columns.
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Each column has to be either X's or O's.
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There can never be two different letters in
the same column.
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X columns and O columns will always alternate.
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You will never see two X columns side by side
and vice versa.
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If there are three or more Xâs in a column,
demand is in charge and has overcome supply.
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The reverse is also true.
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When the chart produces three Oâs in a column,
this indicates supply has overcome demand.
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In this way, Point and Figure charts show
the establishment of trends and trend reversals
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in a clear and organized manner.
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Their usefulness lies in their ability to
filter out market ânoiseââshort-term
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price fluctuations that occur during longer,
more established trends.
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They do not take trading volume into account
and they are only affected by price movements.
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Ok, how to use point & figure to find supply
and demand zones.
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Now that we have gone through the process
of creating a point and figure chart, the
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next step is to understand how to use this
chart as part of your trading decision-making
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process.
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Point and Figure charts are great for visualizing,
support and resistance levels, trend lines
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and breakouts.
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First letâs talk about support and resistance
using Point and Figure charts.
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A support level is a level at which traders
believe prices will start to move higher after
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hitting the level mark.
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Have a look at these several O's in the example.
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An horizontal row of O's is what you are looking
for when zeroing in on a trend reversal and
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an uptrend to begin.
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An horizontal row of X's marks the resistance
levels you need to be looking for in the P&F
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charts.
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So support levels are identified as a horizontal
row of Os which represents a level at which
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demand overcomes supply, meaning where buyers
feel confident to step in.
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Resistance levels are identified as a horizontal
row of Xs which represents a level at which
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supply overcomes demand, meaning where sellers
feel confident to step in.
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Have a look at this chart.
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At this level, there is more supply than demand
as sellers step in and prices retreat.
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At this level, there is more demand than supply
as buyers step in and prices rise.
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A simple analysis of long term point & figure
charts will often reveal levels at which prices
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consistently find support or resistance.
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These are key areas, from which we will be
actively watching for new point & figure bull
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or bear trends to emerge.
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At support, we will look for further confirmation
such as selling climaxes (particularly if
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on high volume), but this a more advanced
topic for another video.
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Conversely, pay attention when price is reaching
areas where they find major resistance.
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These are levels at which the next price moves
are likely to be downward.
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Trend lines are very important in point & figure
analysis.
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With point and figure charts, drawing trendlines
is easier than with other charts because much
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of the subjectivity is eliminated.
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According to the point & figure theory, when
the time doesnât distort the price action
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anymore, the rising and falling angle of a
market is close to 45-degrees.
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There are four different types of trendlines
you can use with point and figure charts:
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Bullish support,
Bullish resistance,
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Bearish support, and
Bearish resistance.
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The bullish support line is used to identify
those markets that are in an uptrend, and
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to alert you to potential reversals in an
uptrend.
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Markets above their bullish support line should
be assumed to be in long term uptrends.
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The trend line does not connect points and
can therefore be drawn immediately when an
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uptrend begins.
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It is drawn from the lowest point made after
the completion of a bear trend or a significant
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down move.
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And it is drawn at a 45 degree angle.
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However, you can also draw trend line, the
classic way, at any angle you want and backtest
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future price action.
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As a rule of thumb, you should not buy prices
that are trading below their bullish support
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lines.
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A break of a bullish uptrend line (that has
been in place for a considerable amount of
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time) is considered to be a bearish event.
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Markets below their bearish resistance line
should be considered to be in long term downtrends.
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The trend line is drawn from the highest point
after the completion of a significant uptrend
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and is extended downwards at an angle of 45
degrees as far right as possible.
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Again, you can experiment with other angles.
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Short positions should be considered while
the price is below the line and any buy signals
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found below this line should be disregarded.
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A break of the bearish resistance line is
considered to be a bullish event.
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This video was intended to familiarize you
with Point and Figure charts and the basic
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supply and demand theory.
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It is important that you fully understand
how these charts are forming, the box sizes
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and reversals.
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Without a sound knowledge of this information
it will be difficult to understand the following
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videos and the more in depth features of Point
and Figure.
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Iâm currently backtesting these charts,
mainly for support and resistance, and I must
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say, Iâm having good results.
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I can see support and resistance levels much
clearer on these charts.
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Iâm planning another video with the main
Point and Figure chart patterns, and several
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breakout strategies you could apply for swing
trading and day trading.
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But, I donât know if this topic is interesting
to you, I know that these charts are considered
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old and outdated.
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So if you a follow up video on Point and figure
trading, leave a like and subscribe.
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This way weâll know if you'd like to see
more videos like this one.
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And check out our academy program if you want
to further level up your trading.
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Until next time.
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