Statistics of Point&Figure Charts

Point&Figure charts have been around for more than a 100 years and they are still quite popular, especially with commodities and forex traders. This article will do some statistical analysis of the most basic Point&Figure signal.

Point&Figure Charts – price movements only

Unless bar and candlestick charts, which draw a price marker every day, Point&Figure charts are only updated when the price move since the last update has been bigger than a defined amount. This way Point&Figure charts filter out most of the markets noise and only show the significant price moves.

Point&Figure vs. line chart

On the above chart the same data is shown as Point&Figure and line chart.

If the market moves up, every move of 2 points is marked as X. If the market moves down at least 3 times the box-size of 2 points, an O row is started. 2 points down and another O is added, until the market moves up 3 times 2 points. Then a new row of X would be started.

To learn more on the construction of Point&Figure charts please ask google or get a book like the definite guide to p&f charts.

Basic Point&Figure Signals

The basic Point&Figure buy or sell signal occurs, whenever one row reaches the same level as 2 rows ago.

Point&Figure Signals

If a rising row marks the same height as the X row before, you call it a double top.  If the market touches the same level several times (see triple bottom on chart), this would be regarded as an even stronger signal.

Statistical tests of Point&Figure signals

As the Point&Figure patterns are so easy to describe, it is also easy to run a test on them. I was questioning myself, what probability I got, that after a double top is shown on the chart, the current row of X will rise another 1,2,or 3  boxes.

Here are the results for some markets. You see the probability for reaching at least 1,2,3 additional Xs after a double top in dependence of the box size for one X. Daily SPY data from 1994 to now has been used.

SPY P&F double top results

Especially for lager box sizes, the double top formation seems to be a profitable signal. When applying an additional trend filter to this signals, the probabilities can even be better than the ones shown above.

You might say that it is no problem to find a better than 50% long signal in an up-trending market. So lets repeat the test for the EUR-USD Forex data from 1986 until now. EUR has been as high against the dollar in 1986 than it is now, so there is no positive drift looming over the test results.

EUR P&F double top results

Seeing the results above there is no wonder why Point&Figure charts are still quite popular among Forex traders.

Free Webinar: Point&Figure in algorithmic trading

I will host a 30 minutes webinar on how to use Point&Figure and Renko charts in algorithmic trading next week.  Click for free registration and dates.

Hurst Exponent – finding the right market for your trading strategy

The Hurst exponent is a measure for the behaviour of the market. It shows if the market behaves in a random, trending or mean-reversion manner. This can be used to select the right trading strategy for your market.

Hurst Exponent

hurst spx

hurst exponent spx

The hurst exponent describes the self similarity of a market. Self similarity describes how similar past market snippets are to current ones.  A Hurst exponent of 0.5 means that the market, over the long term,  follows a random walk. In this case, in the long run, any trading strategy would be a zero sum game (excluding commissions).

If the Hurst exponent is above 0.5, the market shows a trending behaviour. Past moves are similar to current moves. Markets with a high Hurst exponent are perfect for trend following strategies. If the market went up in the past, there will be a better than 50% chance that it also moves up in the future.

If the Hurst Exponent is below 0.5, the market shows a reverting behaviour. If it went down in history, there is a good chance that it will reverse its direction in the future. These markets are markets for mean reverting strategies and short term reversal pattern analysis.

The picture above shows the Hurst exponent for several time-frames of the SPX. On intraday data (the last 1000 bars have been used for the calculation) the Hurst exponent is below 0.5. So be careful with trend following strategies on intraday data.

On weekly and monthly data the market clearly shows a trending behaviour, If there is a rising week or month, there will be a good chance that also the next week or month will move up.

Hurst Exponent market overview

Hurst market overview

Hurst market overview

Running a scanner over different markets and time frames gives an interesting insight in different markets. On the picture above 1000 bars of daily data is used on the left side, and 1000 bars of hourly data is used on right side.

As it can be seen, Bitcoin surely is the best market to do trend following strategies. It has got a Hurst exponent above 0.5 on both time frames.

A completely different market behaviour is shown with EUR/USD. This market shows a reverting behaviour on daily and hourly charts.

See the chart below: A mean reverting strategy surely would have had some edge with EURUSD (left), while a trend following strategy would have been the right thing for Bitcoin(right)

Hurst Exponent Bitcoin EUR

Hurst Exponent Bitcoin EUR

Tradesignal Coding

To use the Hurst analysis with your own markets you can use the code shown below. It is for private use and research only!

The code uses the python Hurst package to do the calculation. This code is embedded within the Tradesignal Equilla coding, which does the graphical output and takes care of the data.

When you intend to use the code with your Tradesignal make sure to have python and the needed packages installed.

Hurst Tradesignal Indicator

Hurst Tradesignal Indicator

To customise the indicator it has got several settings.

Use the period setting to define how much data should be used for the calculation (number of bars). If set to 0 all data on the chart will be used.

The Plot R/S.. setting can be switched to true to show the R/S analysis. It describes how self similar the data is over different time intervals. Please see Wikipedia for further information

The recalc setting defines after how many bars the calculation is updated.

Get the code

Please acknowledge that you are a private investor and will use the code only for research by typing “hurst” as password on the code download page

Thanks to www.tradesignal.com for the great software.

Free Webinar on Hurst

See more on the Hurst exponent and R/S analysis in my free webinar in February. Register and see dates