In Point-and-Figure charting, traders can look for several buy and sell signals based on support and resistance levels:- Bullish signal: A buy signal occurs when the price breaks above a resistance level, creating a new column of X's. This indicates that the buyers have gained control and the price is likely to continue to rise.
- Bearish signal: A sell signal occurs when the price falls below a support level, creating a new column of O's. This indicates that the sellers have gained control and the price is likely to continue to fall.
- Double top pattern: A sell signal occurs when two consecutive columns of X's reach the same level and fail to break above it. This indicates that the buyers are losing momentum, and a reversal may be imminent.
- Double bottom pattern: A buy signal occurs when two consecutive columns of O's reach the same level and fail to break below it. This indicates that the sellers are losing momentum, and a reversal may be imminent.
- Triple top pattern: A sell signal occurs when three consecutive columns of X's reach the same level and fail to break above it. This indicates that the buyers are struggling to push the price higher, and a reversal may be imminent.
- Triple bottom pattern: A buy signal occurs when three consecutive columns of O's reach the same level and fail to break below it. This indicates that the sellers are struggling to push the price lower, and a reversal may be imminent.
👉 Traders can also look for other patterns, such as bullish and bearish flags and wedges, which can provide additional buy and sell signals. However, it's important to note that no single pattern can guarantee success, and traders should use other technical analysis tools and risk management strategies to make informed trading decisions.
💥In this section, we will delve deeper into the patterns of buy and sell signals that can be observed in the Point-and-Figure diagram. There are many patterns that traders use for technical analysis, but we will focus on two examples: the buy signal on the breakout of a triple top and the sell signal on the downside breakout below a bullish support line.
💥Understanding the principles behind buying or selling signals makes it easy for traders to recognize any pattern formation. In the case of a buy signal, a breakout of resistance occurs after the third peak. Breaking through resistance, according to the principles of support and resistance, indicates a buy signal. The next question is how to identify resistance. The answer lies in the peak of the last two X signals, which turn into O signals indicating selling pressure greater than buying pressure, hence forming a resistance line. When the X signal crosses above, it indicates that demand outstrips supply, resulting in the price rising and a buy signal being generated.
💥On the other hand, the sell signal occurs when the price breaks the support line on the downside, indicating that selling pressure is greater than the support along the trend line or that there is an oversupply, which inevitably leads to a price drop. Traders who used to buy along the trend line are unable to continue buying, due to the increase in selling pressure, which triggers further selling. Thus, a sell signal is generated.
💥However, it is important to note that the breakout point may not always result in an immediate buy or sell signal. Moreover, it is said that the ascending triple top gives the most reliable buy signal, while the breakout of the triple bottom gives the most reliable sell signal. But the level of trust in these signals may vary from trader to trader, and it is ultimately up to each trader to determine their own level of confidence in these patterns.