Learn / Putting it to work
Managing risk with P&F
Using the chart's own structure to place stops.
One of the greatest strengths of Point & Figure is that the chart shows you where a trade is wrong. Every signal has an opposite signal, and the level that would trigger it gives you a logical place for a stop.
Where the chart says you're wrong
For a long position
The classic reference is the level that would produce a Double Bottom sell signal: one box below the bottom of the most recent column of O's. If price falls there, the buy signal you acted on has been reversed.
For a short position
The level that would produce a Double Top buy signal: one box above the top of the most recent column of X's.
Some traders use the trend line instead: exit a long position if price breaks below the Bullish Support Line. This gives the trade more room, at the cost of a larger potential loss.
Moving the stop as the trade works
As a stock rises and forms new O columns at higher levels, each new O column bottom becomes the new reference. Raising the stop to just below each higher low lets profits run while protecting what's been gained.
Size the position to the stop
Decide how much you're willing to lose on one trade before you enter. Divide that amount by the distance from your entry to your stop. The result is the number of shares. A trade with a stop $0.50 away can be larger than one with a stop $2.00 away, for the same dollar risk.
Check the reward against the risk
Compare the distance to your stop with the distance to the nearest resistance or to the price objective. A setup offering at least two or three times the reward relative to the risk is generally worth considering; one offering less than the risk usually isn't.
No pattern works every time. Risk management is what keeps the trades that don't work small, so the ones that do can make a difference.
For education only. Nothing here is investment advice or a recommendation to buy or sell any security.