Learn / Putting it to work

Common mistakes

The errors that trip up most new P&F traders.

Point & Figure rules are simple, but a few mistakes come up again and again. Avoiding them will make a bigger difference than learning another pattern.

1. Acting before the signal

A Triple Top isn't a Triple Top until the third X column breaks the level. Buying because a stock "looks like it's about to break out" means acting on a pattern that hasn't happened. Many don't.

2. Ignoring the trend

A buy signal below the Bearish Resistance Line is fighting the trend. These signals fail far more often than buy signals in a positive trend. Check the trend before every trade.

3. Changing the box size to find a pattern

If you keep adjusting the box size until a chart shows a signal, you're fitting the chart to your opinion. Choose the box size first, then read the chart honestly.

4. Treating every signal the same

A Double Top in the middle of a choppy range and a Quadruple Top breakout above a long base are both "buy signals," but they're not equally meaningful. Context, the number of tests and the width of the base all matter.

5. No exit plan

Every P&F signal comes with a natural point where it would be proven wrong. Decide on that level before you enter, not after the trade moves against you. See Managing risk.

6. Mis-plotting reversals

The most common plotting error is starting a reversal column at the wrong level. A new O column starts one box below the top X, not at the top X. A new X column starts one box above the bottom O. See Plotting a chart.

7. Expecting time to tell you something

A P&F chart has no time axis. A pattern that's "taking too long" isn't failing; it simply hasn't completed. Let price, not the clock, decide.

8. Chasing extended moves

After a long column of X's, the stock may be far above any logical stop. Buying there means a large risk for the same signal. Waiting for a pullback, or a Catapult, often offers a better entry.

For education only. Nothing here is investment advice or a recommendation to buy or sell any security.