Chapter 2 – Characteristics and Construction

Already you will have seen that Point and Figure charts are different from any other type of chart. In order to define them however, certain characteristics must be enumerated and discussed. These characteristics are also important for the understanding and interpretation of the charts.

Characteristics of Point and Figure charts

Point and Figure charts have the following unique features, all of which are explained in greater detail below:

They are usually8 constructed with Xs and OS9 instead of lines or bars. Xs represent sequential up movements in price.
Os represent sequential down movements in price.
The Xs and Os are called ‘boxes’.

Each X and 0 represents a discrete price interval, which is called the ‘box size’.

Price changes below this interval are ignored when plotting the chart.

•

8 Sometimes it is better to use XS only. This is clarified later. 9 Meaning the letter X and the letter o.

A column of Xs changes to a column of Os (and vice versa) when the price changes direction by a given number ofboxes. This is called the ‘reversal size’.

The columns ofXs and Os represent demand and supply.

The chart sensitivity can be varied to show the short, medium and long-term position using the same data.

No record is made of price gaps.
Price is scaled on the vertical Y axis.
There is no time-scale along the horizontal X axis.
Time plays no part in the construction or analysis of Point and Figure charts. Although there is no time axis, Point and Figure charts are two-dimensional charts. Volume plays no part in the construction or analysis of Point and Figure charts. Point and Figure charts are named according to their box and reversal size.

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The Definitive Guide to Point and Figure

Constructed with Xs and Os

You will recall that early Point and Figure charts were constructed with numbers or figures and that these numbers were replaced by Xs, which were eventually replaced with Os and Xs. Every time you look at a Point and Figure chart, you must visualise this. You will learn that it is often better to construct some Point and Figure charts using XS only.

Up moves and down moves

Xs are used to indicate up moves in price and Os are used to indicate down moves. Using two different letters makes Point and Figure charts very readable. You can instantly see the general trend, and within that general trend you can see the intermediate pullbacks against the trend represented by alternate columns of XS and Os. Computer-drawn Point and Figure charts allow XS and Os to be drawn in different colours, normally blue for up and red for down.

Xs and Os called boxes

You have seen why they are called boxes, because on squared paper the XS and Os are drawn in ‘boxes’. You will find, when you look at construction, that the word ‘box’ is used to describe the Point and Figure chart.

Box size

You will recall that early Figure charts ignored any fractional movement. This meant that a figure could only be written down when the price reached that level. The same applies to Point and Figure charts constructed with XS and Os. Each X and 0 is given a sensitivity value before the chart is constructed. This is called the box size. It may be 1 point, Y2 a point, or it may even be 50 points. No matter what value is assigned, you may not plot an X or 0 until the price has reached the next interval. For example, if each X and 0 is 50 points, then the values of ascending XS would be 50, 1 00, 1 50, 200 and so on. A price move from 50 to 99 would be ignored because it had not reached 100. It is important to note that the ‘box’ represents the price and not the line. Point and Figure charts are plotted differently from line or bar charts. With line or bar charts the price scale is represented by lines, so a price of 1 00 is on the horizontal line at 100. With Point and Figure charts however, 100 is a square with an X or an 0 above the 1 00 line. This often confuses students of Point and Figure and will be seen when the construction procedure is explained.

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Chapter 2 – Characteristics and Construction

Reversal size

The reversal size is an important part of Point and Figure chart construction. It is the number of boxes required to change from a column of XS to a column of Os or from a column of Os to a column of Xs. Depending on the type of Point and Figure chart you are drawing, the reversal size can be I-box, which is the original method, 3-box, 5-box, or any other value. It is, however, important to note that this terminology has changed for the better over the years. Cohen and others before him referred to 3-point reversal charts, meaning that the box size was 1 point and so a reversal of 3 boxes was 3 points. This was fine when Point and Figure charts were constructed with a box size of I -point, but started to get confusing when the box size was, say, S points. The reversal was then referred to as a I S-point (5 x 3) reversal chart. You will however still hear Point and Figure analysts talk of their 3-point reversal charts, meaning their 3-box reversal charts.

Variable sensitivity

One of the unique characteristics of Point and Figure charts is that the sensitivity to price changes can be varied by varying the box size – that’s the number ofpoints that each X and o represent – as well as the reversal size – the number of Xs or Os required to convert from a column ofXs to Os or Os to Xs. This will be explained in much greater detail later.

Gaps

Point and Figure charts do not record gaps. If the price jumps from 10 to 15, each price on the way to 15 (that is 11, 12; 13 and 14) is recorded by an X. As you saw in the development of Figure charts, you cannot leave out a price row just because the price did not print there. The reason is that it may be required in the future if the price trades at that level later in the chart.

Price on V-axis but no time on X-axis

Point and Figure charts have a vertical y-axis scale for price, but no horizontal x-axis scale where time would usually be shown. Point and Figure charts are constructed as and when new prices are received, with no regard to time. Time is therefore not a factor in the construction or interpretation. Only when the instrument trades at a new price is the Point and Figure chart updated, provided the condition for plotting an X or 0 is fulfilled. This means that whereas line and bar charts assign equal importance to every time interval, whether that be days or minutes, Point and Figure charts do not. Instead, their second dimension is related to the changes in direction of the price. So, you will not find a time or date scale on a Point and Figure chart, but you may find references to dates. Some Point and Figure analysts place the number of the month into a box instead of an X or 0 to signify the start of a new month. The

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The Definitive Guide to Point and Figure

only reason for doing this is to have a reference point. It has no influence on the analysis of the chart at all. Most modern software allows you to read off approximate dates making the use of these month numbers redundant.

Two-dimensional charts

It is important to be clear that Point and Figure charts are not one-dimensional, as many believe. It is true that they do not have a time-scale, but that does not cause them to be one­ dimensional. They are, in fact, two-dimensional. This usually comes as a shock to those who have a basic knowledge of Point and Figure charts. A chart has two dimensions when it has two axes: a y-axis and an x-axis. In bar and line charts, price is scaled on the vertical y-axis and time is scaled along the x-axis. With Point and Figure, price is scaled on the vertical y-axis and the number of columns of Xs and Os is scaled along the horizontal x-axis. The x-axis therefore measures the number of changes in direction because each time the price changes direction, a column of Xs becomes a column of Os and vice versa. This has important implications for the analysis and understanding of Point and Figure charts and trend lines, as you will see.

No volume

There is no room for volume in Point and Figure charts. Volume, although a valuable ingredient in market analysis, is not required in Point and Figure construction or analysis. Point and Figure charts, however, do cater for volume in a different way. Rather than recording number of shares or contracts traded, Point and Figure charts record number of price reversals, which could be thought of as activity volume.

Demand and supply

Because Point and Figure charts divide intermediate uptrends into columns of Xs and downtrends into columns of Os it is easier to see the buying pressure, or the demand, by the length of the column of Xs, and the selling pressure, or supply, by the length of the columns of Os. The equilibrium of these two forces is an important part of Point and Figure analysis, which is discussed in chapter 3 .

Naming Point and Figure charts

It is customary now to name Point and Figure charts with the box and reversal size. The person looking at the chart needs these two parameters to understand the chart. A Point and Figure chart, where the box size is 1 0 and the number of boxes required to change columns is 3, is referred to as a 1 0 x 3 ( 1 0 by 3) Point and Figure chart. This convention leaves no room for doubt, when looking at a Point and Figure chart, as to what the box and reversal are.

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Point and Figure construction

Many students ofPoint and Figure ignore the construction chapters because modem software does it for them. Whether or not you intend to draw Point and Figure charts by hand, it is vital that you understand the construction, as this explains the behaviour and psychology behind them. That aside, you may not know that there are a number of ways to construct Point and Figure charts and that these methods are not mutually exclusive. So, do not ignore the rest of this chapter. You will come out knowing a lot more about the whole meaning of Point and Figure charts. This book is designed as a complete reference work, which brings together all the known Point and Figure construction methods for the first time. It would therefore be remiss to leave out any method and the accompanying examples.

Now that there is an accepted way of drawing Point and Figure charts, using Xs and Os, construction may be tackled. Unfortunately, under the umbrella of Point and Figure, there are a number of different Point and Figure charts, each of which is constructed, and consequently interpreted, in a different way.

It was established earlier that true Point and Figure charts require intra-day tick data because they were originally constructed from the tape or from the floor, so this construction method will be looked at first, where all the price changes during the day are available and every price is considered in the order it is received.

Remember, up movements in price are designated by plotting a column of Xs and down movements by plotting a column of Os. Point and Figure charts plot discrete movements only, so in order to construct a Point and Figure chart, you must decide what value each X and 0 will have. This is the box size. Traditionally it was 1 point or 1 c or 1 p, but this is hardly practical when plotting a Point and Figure chart of the Dow Jones Industrial Average, or an exchange rate. So, the value you assign to each X and 0 must be decided by considering the instrument in question and deciding what price moves you wish to isolate. This will depend on the range and level of the prices in question. For example, you might use 50 points for the FTSE 100 Index, 100 for the Dow, or .001 for an exchange rate, and so on, but this will be covered in detail later. It is important to use ’rounded’ values like 1, 2, 5, 10, 15, 20, 25, 50, 1 00 etc. or multiples of these. Don’t be tempted to use values like 7 or l 3 or 38 just because the chart will fit on the sheet of paper you are using.

In addition to deciding on the box size, there is another factor in the construction ofPoint and Figure charts. You must decide by how much the price must reverse in order to change from an X to an 0 or 0 to an X. In practice, this amounts to the number of boxes required to change direction. This is called the reversal. Traditionally the reversal has been I -box, 3-box or 5-box, where to record a change in direction the price must reverse by either the value of I -box, 3 boxes or 5 boxes. These will be dealt with in tum as the construction for each is different.

Chapter 2 – Characteristics and Construction

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The Definitive Guide to Point and Figure

I -box charts provide the detail of the price action and are vital for understanding the demand and supply forces involved. 3-box charts provide more of a summary of the price action, without showing the detail that the I-box charts show, and are vital for assessing the short, medium and long-term trend. Finally, 5-box charts show the main long-term trend with none of the detail shown in 3-box charts.

1 -box reversal charts

If you followed the history and development of Point and Figure charts in the previous chapter, you will know that the I -box reversal is the original type of Point and Figure chart. Unfortunately, it is a method that seems to have been forgotten and, when it is remembered, the charts are usually presented incorrectly, immediately destroying their character and usefulness. This is caused by a basic misunderstanding of how Point and Figure charts developed. With the previous chapter read and digested, you are well on your way to a full understanding of Point and Figure charts.

A I -box reversal means that if the price reverses by the value of one box, an up-column changes to a down-column or a down-column changes to an up-column. Remember, up­ columns are usually represented by XS and down-columns by Os. So, each time the price reverses by the value of at least one full box you move across by one column and start plotting in the opposite direction, changing from an X to an 0 or an 0 to an X.

Why change columns when price reverses?

Cast your mind back to the development of Point and Figure charts discussed in the previous chapter. Consider why you move to the next column when the price changes direction. The only reason you move across to the next column is to avoid plotting an X on top of an 0 and vice versa. There is no other reason. Remember when discussing the development of Point and Figure charts, early Figure charts were shown. When the price rose to 16 in the first column and then fell back to 15, they had to move the next column to write the number 15. See Figure 1 – 1 . This was done to avoid writing 1 5 i n the space already occupied by 1 5 on the way up. It is as simple as that. This is one reason why understanding the development ofthese charts is so important.

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Chapter 2 – Characteristics and Construction

16 15 14 13 12 11 10

Figure 2-5: Development of a 1 -box reversal chart

You could now be forgiven for thinking, therefore, that it is impossible to have an X and 0 in the same column. Most students of Point and Figure have had this drummed into them and believe it to be the case, but it is wrong. With I-box reversal charts, it is possible to have an advancing X and declining 0 in the same column. In order to get this across to new students of Point and Figure, it is necessary that the condition is given a name and that name is one­ step-back.

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Chapter 2 – Characteristics and Construction

16 15 14 13 12 11

10

Figure 2-7: Development of a 1 -box reversal chart showing one-step-back

Therefore, contrary to many beliefs, it is possible to plot an X and an 0 in the same column.

The one-step-back is a powerful sign. When the price reverses by just one box, it may be the start of a correction or just be a temporary aberration in the trend, so you need to wait for the next plot in the column to tell you whether the trend is going to continue from the previous column or whether it is a true reversal. If it is a temporary change, the price will reverse back and when it does, the next X or 0 must be plotted in the same column.

It means that any supply during the uptrend is quickly absorbed and the demand takes control again. Consider the analogy of walking up a steep hill. At some stage you may wish to pause, take a breath, even steady yourself to strengthen your resolve by taking a step back, before determinedly stepping forward again to continue the ascent. The process of steadying yourself and then, instead of turning back down the hill, continuing up strengthens your resolve.

Plotting an X and 0 in the same column may seem strange (even incorrect) and difficult to do, but it is important for the Point and Figure chart as a whole, especially with regard to the width of the patterns and the counts that will be discussed later.

Figure 2-8 and Figure 2-9 overleaf show the wrong way and the right way to construct a I -box reversal Point and Figure chart. Unfortunately, the wrong way, where a new column is started every reversal, is sadly seen all too often.

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The Definitive Guide to Point and Figure

Figure 2-8: Incorrect construction of a 1 -box reversal chart

Figure 2-9: Correct construction of a 1 -box reversal chart

64

Notice the difference between the two charts. Figure 2-9, the correct chart, shows the congestion areas more clearly than Figure 2-8, the incorrect one. Notice also that the width of the charts is different. This has important implications for analysis of congestion and establishing price targets, which will be dealt with later.

One-step-back also applies to downtrends, where an X corrects the downtrend and an 0 follows in the same column as the downtrend continues.

Using other box sizes

All the Point and Figure examples considered so far have assumed a box size of 1 point. That is how the original Point and Figure charts were constructed, although occasionally 12 point charts were used. The problem is 1 point or 12 point charts are far too restrictive and far too sensitive for many of today’s instruments. With the Dow Jones Industrial Average at 1 0,000, you would not be that interested in 1 point movements because the Dow doesn’t move 1 point at a time. It is more likely that you would be interested in 50 point or 100 point moves. Consequently, when constructing any Point and Figure chart, consideration has to be given to the value placed on each X and O. You therefore need to understand how to construct a I -box reversal chart when the box size is greater than 1 .

Chapter 2 – Characteristics and Construction

65

Chapter 2 – Characteristics and Construction The first thing you have to do is to decide whether the first box will be an X or an O. It will

be an X if the initial price trend is up and an 0 if the initial price trend is down.

Take note of the first price, 1 1 00, and look at the second price. If the 2nd price is 1 1 1 0 (remember you are interested in 1 0 point movements) or higher then the 1 st plot is an X. If it is 1090 or lower, the first plot will be an O.

Ifthe2ndpriceisnotonefullbox(10pointsinourexample)awayfromthe 1stprice, which is the case in this example, then ignore that price, look at the 3rd price and apply the rule. Continue doing this until you find a price that has either risen or fallen by at least 10 points from the first price. In this example, the second price of 1105 does not satisfy the condition because it is only 5 points away from the first price, but the 3rd price of 1 1 1 0 is 10 points higher than the first price. This allows you to start the Point and Figure chart by plotting two Xs in the 1 1 00 and 1 1 1 0 boxes, ignoring the 2nd price. See Figure 2-10.

Figure 2-1 0: Construction example of a 1 -box reversal chart

Immediately you can see that the Point and Figure chart does not plot every price, only those that satisfy the construction conditions.

Now you have the start of your Point and Figure chart, you can continue through the rest of the price series, but stop to think what it is you are doing. Because this is a l O x 1 Point and Figure chart, it means you are not interested in any prices less than 10 points away from the lastplotted box.

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The Definitive Guide to Point and Figure

IMPORTANT NOTE:

It is always the last plotted box that is considered when deciding whether to fill the next box or change columns. Do not make the mistake of considering the last price. Once a price is used to plot an X or 0, the price itself is discarded and no record is kept. It is not possible to look at a Point and Figure chart and know what price generated any X or O.

The 4th price is 1 1 12, which is ignored because it is not 10 points higher than the last plotted box of 1110.

The 5th price is 1118, which is also not 10 points higher than the last plotted box of 1110.

The 6th price is 1120. This is 10 points higher than the last plotted price of 1110 and so an X can be placed into the 1120 box. See Figure 2-11.

Figure 2-1 1 : Construction example of a 1 -box reversal chart

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Figure 2-1 2: Construction example of a 1 -box reversal chart

The 8th price is 1 1 2 1 . Remember, the last plotted box was 1 1 30. This means that to plot another X, the price must be 1140 or higher, or to plot an 0 it must be 1120 or lower. So even though the price has fallen by 1 5 points, the price has not reversed by 1 0 points from the last plotted box of 1 1 30, so the 8th price is ignored.

The 9th price is 1 1 29. Again, this is ignored.

The 10th price is 1 120. This is 10 points away from the last plotted box of 1 1 30, so you must place an 0 in the 1120 box, which means you must move to the next column to find a vacant box.

Chapter 2 – Characteristics and Construction

The 7th price is 1 1 36. That one is also easy; simply place an X in the 1 130 box. See Figure 2-12. Only one X can be plotted, despite the 16 point price rise, because to plot two Xs, the price would have to have risen to 1 1 40.

Figure 2-13: Construction example ofa 1-box reversal chart

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The Definitive Guide to Point and Figure

The 1 1th price is 1 139, which is 19 points higher than our last plotted box of 1 120, so you must plot an X in the 1130 box. You can’t extend it as far up as the 1140 box, because the price has not reached 1 140. The important thing is that this time you do not have to change columns, because the 1130 box in column 2 is vacant. You can, therefore, remain in the same column and plot the X above the o. See Figure 2-14. Remember the one-step-back discussed on page 62.

Figure 2-14: Construction example of a 1-box reversal chart showing one-step-back

The 1 2th, 1 3th and 1 4th prices are neither 1 1 40 or higher, nor 1 1 20 or lower and so they are all ignored.

The 15th price is 1 113, which is 17 points lower than the last plotted box of 1 130. This means you must place an 0 in the 1 120 position only. You can’t extend as far down as 1 1 1 0, because the price has not reached 1 1 1 0. You also can’t remain in the same column because the 1 120 box is already occupied. You must therefore move to the third column

to plot the 0 in the 1120 box. See Figure 2-15.

Figure 2-1 5: Construction example of a 1 -box reversal chart

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The 16thpriceis 1139,whichis 19pointshigherthanthelastplottedboxof1120.This meansyoumustplaceanXinthe 1130positiononly.Youcan’textendasfarupas 1140, because the price has not reached 1 140. Again, the one-step-back rule applies and you can place the X in the same column without moving across. See Figure 2-16.

Figure 2-1 6: Construction example of a 1 -box reversal chart

The 1 7th, 1 8th and 1 9th prices are neither 1 140 or higher, nor 1 120 or lower and so are ignored.

The 20th price is 1 1 1 1, which 19 points lower than the last plotted box of 1 130, so you must place an 0 in the 1 120 box, but not the 1 1 10 box. Ifyou look at Figure 2-16, you can see that to do this, you have to move across to column 4. See Figure 2-17.

Chapter 2 – Characteristics and Construction

Figure 2-1 7: Construction example of a 1 -box reversal chart

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The Definitive Guide to Point and Figure

It is worth pausing here to look at the chart. Notice how many times the price has reached the 1130 level, only to be forced back again. This is an example ofthe fight going on between the bulls and the bears.

The 2 1 st price is 1 095, which is 25 points lower than the last plotted box of 1 1 20. This means you must fill the 1 1 1 0 and 1 1 00 boxes. As there is space in the same column, you can simply place the two Os below the previous O. See Figure 2- 1 8 .

Figure2-18: Constructionexampleofa 1-boxreversalchart

The nnd, 23rd and 24th prices are neither 1 1 1 0 or higher, nor 1 090 or lower, so they are ignored.

The 25th price is 1 1 29, which is 29 points higher than the last plotted box of 1 1 00, so youmustplaceanXinthe 1110boxandthe 1120box.YouareplottingtwoXs.Todo this you must move across to the next column. See Figure 2-19.

Figure 2-1 9: Construction example of a 1 -box reversal chart

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Chapter 2 – Characteristics and Construction

Figure 2- 1 9 shows the chart after the first 25 prices, but notice that there are only 1 3 Xs and Os. It is important to remember that there does not have to be an X or 0 for every price. Sometimes, the price change does not fulfil the condition for a new X or O.

The above may have been tedious to follow, but, as stated before, much ofthe power of Point and Figure charts comes from a full understanding ofwhat is behind their construction. Ifyou have had difficulty in understanding the plotting, try to think of it in terms of filling and emptying glasses.

Filling and emptying glasses

Plotting Point and Figure charts is like filling and emptying glasses of water. Imagine the boxes are straight-sided glass tumblers. When plotting a column of Xs, you arefilling a glass and only once it is full do you plot the X, stack the full glass on top of the previous one and pick up an empty glass to start filling again. When plotting a column of Os you are emptying a glass and only when the glass is empty do you plot the 0, stack the empty glass and pick up a full one ready to start emptying it.

Let’s look at an example. Let’s assume you are plotting a column of Xs (a rising column) and haveplottedthe 1120box.Thismeansthatthe 1120glassisfullbutthe 1130glassisempty. If the price rises to 1 1 2 5 , this means that the 1 1 3 0 glass is half full and so the 1 1 3 0 box cannot yet be plotted. If the price rises to 1 1 29, the 1 1 30 glass is almost full but still not completely. If the price rises to 1 1 30, the 1 1 30 glass is now full. The X can be placed in the 1 1 30 box and the glass ‘put down’. An empty 1 140 glass is then ‘picked up’. Most students find this concept easy to grasp, but have difficulty with down-columns of Os and emptying glasses.

If you are plotting a column of Os (a falling column) and have plotted the 1 1 20 box, it means that the 1 1 20 glass is empty, you have ‘put it down’ and ‘picked up’ thefull 1 1 1 0 glass. If the price falls to 1 1 1 5 , this means that you have ‘poured out’ half the water from the 1 1 1 0 glass t h a t i s n o w h a l f fu l l . I f t h e p r i c e fa l l s t o 1 1 1 1 , t h e 1 1 1 0 g l a s s i s a l m o s t e m p t y . I f t h e p r i c e fa l l s to 1 1 1 0, the 1 1 1 0 glass is empty and can be ‘put down’ and an 0 placed in the 1 1 1 0 box. I f you are having difficulty completing the following example, think about filling and emptying glasses.

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The Definitive Guide to Point and Figure

Using the half-completed template in Figure 2-20, and the last 25 prices in Table 2-1, complete the Point and Figure chart and see whether yours looks like the one in Figure 2-2 1 .

Figure 2-20: Construction example of a 1 -box reversal chart

Figure 2-21: Construction example ofa 1-box reversal chart

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The Definitive Guide to Point and Figure

3-box reversal charts

Soon after Point and Figure charts became more widely used, there came a need for a less sensitive chart. The 3-box reversal chart, sometimes called 3-box minimum reversal chart, was the answer. The first reference to these charts was made by De Villiers in 1933, which suggests that they must have been well established by this time. They are not a substitute for I-box charts, but rather a complement to them.

A 3-box reversal chart means exactly what its name implies. A change from an X to an 0 or an 0 to an X is only undertaken if the price reverses (changes direction) by the value of at least 3 boxes. lt has the effect of condensing the price movement by getting rid of minor reversals during a prevailing trend. 3-box charts, therefore, give more weighting to the prevailing trend. The chart can never have less than 3 Xs or 3 Os in any column and, consequently there can never be an X and 0 in the same column, so no one-step-back exists in 3-box charts.

Constructed from 1-box charts

Traditionally, 3-box charts were constructed at the end ofthe trading day directly from the 1- box chart. The original prices were no longer available, simply the trader’s I-box representation ofwhat the price did during the day. The day’s movement from the I-box chart was transferred to the 3-box chart which showed months, perhaps years of trading history.

Unique asymmetric filter

3 -box charts consider the value of 3 boxes when a reversal is being determined, but the value of 1 box when a continuation of trend is being determined. This gives greater weighting to the prevailing column and hence the trend. If the current column is an X column, the price needs only to increase by the value of 1 box to generate a new X, but in order to generate a change of column to an 0 column, the price must fall by the value of 3 boxes. This is a unique feature of Point and Figure charts where the reversal size is greater than 1 . The price is ‘filtered’ differently, depending on whether the price change is in the direction ofthe current column, and therefore the trend, or against it.

lt is here that many an unwary Point and Figure student gets confused and caught. Say that you are plotting a 1 x 3 Point and Figure chart and the price is at 12. See Figure 2-22. Remember 1 x 3 means each box is worth 1 point and the price must reverse by the value of 3 boxes, which is 3 points, in order to change direction.

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The Definitive Guide to Point and Figure

Figure 2-24: Development of a 3-box reversal chart

If the price rises to 1 4, you must plot another X because 14 is one X above 1 3 . See Figure 2-25.

16

15

14

13

78

12

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,

4� ,

– _ 4� 11 ..(

10

Figure 2-25: Development of a 3-box reversal chart

Ifthe price then falls to 11, that is now 3 points away from the last plotted box of 14. This is a reversal of 3 boxes or, in this case, 3 points. You must now change columns and plot 3 Os in the second column, taking you down to 1 1 . See Figure 2-26.

The Definitive Guide to Point and Figure

So remember, when you are plotting a 3-box reversal chart, you have to look at either plotting another box in the direction of the current column, or a new column of at least 3 boxes, if the price has reversed.

Consider the value of the box

It is important to note that when attempting to establish a reversal (change in columns), the value of 3 boxes is calculated from the last plotted box and not from the last recorded price. For example, ifyou are plotting a 10 x 3 chart and the last price in a rising market (a column of Xs) is 547, you would place an X in the 540 box. Once this is plotted, the figure of 547 is discarded and the value of the last box (540 in this case) is retained. So, in order to change columns and plot a column of Os, the price must reverse by at least 30 (10 x 3) points from the last plotted box, which means the price must reach 540-30 = 5 1 0, not 547-30 = 5 1 7. This will become more evident in the example below.

Example of a 1 0 x 3 Point and Figure chart

The best way to illustrate the plotting of a 3-box reversal chart, and the difference between the I-box and 3-box method, is to plot a chart using the same set ofdata in Table 2-1 on page 66, used for the I -box reversal chart example.

As before, the box size is 1 0. This means that any movement less than 1 0 is ignored. The chart you are going to construct is called a l O x 3 Point and Figure chart. This means that each X and 0 is worth 1 0 points and the reversal required to change columns is 3 boxes or 30 points from the last plotted box.

As with I -box charts, the first thing you have to do is to decide whether the first box will be an X or an O. It will be an X if the initial price trend is up and an 0 if the initial price trend is down. The procedure is the same as that outlined when the I-box chart was plotted and results in 2 XS being plotted using the first 3 prices. See Figure 2-28 opposite.

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Chapter 2 – Characteristics and Construction

Figure 2-28: Construction example of a 3-box reversal chart

Like the I-box charts, 3-box charts do not plot every price, only those that satisfy the construction conditions.

You now have the start of the Point and Figure chart and can continue through the rest of the price series ignoring any price moves that are less than 1 0 points away from the last plotted box. Do not make the mistake of considering the last price.

The 4th price is 1 1 12, but it is ignored because it is not 10 points higher than the last plotted box of 1110.

The 5th price is 1 1 18, which also is not 10 points higher than the last plotted box.

•

1 1 40
1 1 30
1 1 20 X 1110 X 1 1 00 X 1090

Figure 2-29: Construction example of a 3-box reversal chart

The 6th price is 1120. This is 10 points higher than the last plotted box of 1110 and so an X can be placed into the 1 1 20 box. See Figure 2-29.

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The Definitive Guide to Point and Figure

The 7th price is 1 1 36, so another X can be placed in the 1 1 30 box. See Figure 2-30.

Figure 2-30: Construction example of a 3-box reversal chart

The8thpriceis 1121.Remember,thelastplottedboxwas 1130.Thismeansthattoplot another X the price must be 1 1 40 or higher, or to plot an 0 it must be 1 1 00 or lower – that is 3 boxes, or 30 points, lower. It is neither, so the 8th price is ignored.

The 9th price is 1 129. Again, this is ignored.

The 10th price is 1 120. This is 10 points away, and against the price direction ofthe last plotted box of 1 130, but, because you are plotting a l O x 3 chart, the price must reverse by 3 boxes or 30 points to change columns. It has not done this, so it is ignored.

The 11th price is 1139, which is neither 10 points above nor 30 points below the last plotted box of 1 1 30, so it is ignored. Remember, what you are doing now is looking for

1140 or higher to plot another X or 1100 or lower to plot 3 Os.

The 12th, 13th, 14th, 15th, 16th, 17th, 18th, 19th and 20th prices are neither 1140 or higher, nor 1 1 00 or lower and so they are all ignored.

The 2 1 st price is 1 095, which is 35 points lower than the last plotted box of 1 1 30. This means there has been a reversal in the price of at least 30 points, which is enough to plot a column of Os. You plot this by moving to the next column and plotting three Os down to the 1100 box. See Figure 2-31. Remember, you can’t plot down to the 1090 box because the price has not reached 1 090. Think about emptying a glass of water. In this case, the glass is halffull because it is at 1095.

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Figure 2-31 : Construction example of a 3-box reversal chart

The 22nd price is 1 102. This is neither 10 points below the last plotted box of 1 100 nor the 30 points needed to plot a new column of XS in the other direction, so it is ignored.

The 23rd price is 1 108 and is ignored as well, as is the 24th price of 1092. Remember, with the last plotted box having been 1 1 00, you either have to see a new price of 1 090 or lower to plot an 0, or a reversal price of 1 130 or higher to plot 3 Xs.

On the same basis, the 24th and 25th prices are ignored as well.

Figure 2-3 1 above shows the chart after the first 25 prices. Notice that there are now only 7 Xs and Os, so much of the price movement has been condensed and filtered out.

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As before, there are 25 prices left to plot. It is suggested that you use the template in Figure 2-3 1 to complete the chart and see if yours looks like the completed chart in Figure 2-32.

1 1 60

1100 X 0 1 090

Figure 2-32: Construction example of a 3-box reversal chart

Table 2-3 shows the prices and boxes that were plotted.

1 1 50

X 1 1 40 X 1130 X X 1120 X 0 X 1110 X0X

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Constructed from the 1 -box chart

As stated earlier, 3-box charts were originally compiled from the I-box charts. Referring to Figure 2-2 1 , the procedure is to work your way across the I -box chart from left to right noting first the direction of the current column and whether there has been a reversal of three boxes against it. The first column rise of4 Xs must be plotted on the 3-box chart ending at 1130. Column 2 with one X and 0 is ignored, as is column 3. Column 4 has three Os down to 1 100 andsothisreversalmustbeplottedonthe3-boxchart.Column5hasthreeXsupto 1130and this must also be moved to the 3-box chart. Column 6, with two Os is ignored, as is column 7, with two Xs. Column 8 extends the last X in the 3-box chart by two further XS to 1150 and must therefore be plotted. Column 9 is ignored because it only has two Os.

This method is only useful ifyou are plotting a I-box chart by hand first and wanting a 3-box chart as well. Ifyou have no intention ofusing I-box charts, you may simply plot the 3-box chart from the original price data.

Characteristics of 3-box reversal charts

You can now see that 3-box reversal charts are very different from I-box charts. The main difference is in the unique asymmetric filter. You have learnt that all Point and Figure charts filter the price by ignoring any movement below the box size. This is very effective in eliminating noise from the data.

I -box charts apply the same filter to the price in both directions. In other words, you add a box to an existing column if it has moved in the same direction as the column, but you also add a box to a reversal column if it has reversed by the box size.

You should now understand this is not the case with 3-box reversal charts. 3-box charts apply a I -box filter in the direction of the current column, but a 3 -box filter against the direction of the current column. For example, if you are plotting a 50 x 3 Point and Figure chart and the current column is an X column, every 50 point increase in price from the last box plotted is added to the X column, but in order to change columns and plot a column of Os, the price must fall by the value of3 boxes or 150 points!

The converse is true if the current column is an 0 column. Any fall in price of 50 points or 1 box results in a new 0 box, but the price must rise by the value of at least 3 boxes to change columns and plot a new column ofXs.

So, 3-box charts are giving more emphasis to the current trend, defined by the latest column – either uptrend XS or downtrend Os – and ignoring any ‘minor’ reactions against that trend which are less than 3 boxes.

This is entirely unique. All other price-filtering mechanisms are symmetrical, taking no account of the prevailing trend when assessing the filter. For this reason, the reversal against the trend – the appearance of a new column in the opposite direction – can be used as a trailing stop, which will be covered later.

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5-box reversal charts

5-box reversal charts appeared at the same time as 3-box charts, but they are rarely used today. The principle is exactly the same as that for 3-box charts, but the price must reverse by the value of 5 boxes in order to change columns. This has the effect of condensing the Point and Figure chart even more. The minimum number of boxes in any column is therefore 5 . Originally they were also constructed from the I -box chart.

They tend to be used when analysing very volatile instruments, or by traders who wish to remain within the trend and are prepared to accept larger drawdowns before they are alerted to a change in direction. They are also used to obtaining the long-term picture.

Using the same prices as before, the 5-box reversal chart is shown in Figure 2-33 below.

Chapter 2 – Characteristics and Construction

1150 X 1140 X 1130 X 1120 X 1110 X 1100 X 1 090

.1
Figure 2-33: Construction example of a 5-box reversal chart

Notice the chart is even more compressed, so much so that there are no columns of Os at all. This is because at no time did the price reverse by 5 boxes or more. It is easy to see when comparingthe I-boxreversalchartinFigure2-21,the3-boxreversalchartinFigure2-32and the 5-box reversal chart in Figure 2-33, that not only are they compressing and filtering the price movement, but they are also changing the sensitivity, and in effect, changing the time horizon of the chart. This point about changing the time horizon is a unique feature of Point and Figure charts, because using the same set of data, you can alter the sensitivity and hence the time horizon even though there is no time axis. There is more about this later.

The same unique asymmetric filter is present in 5-box reversal charts, but of course the filter is now 5 boxes against the current trend.

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Characteristics of 2-box reversal charts

2-box charts have the same characteristics as 3-box charts, but they are more sensitive. They have the asymmetric filter but the difference between the with-trend filter is only slightly different from the against-trend filter. They can be thought of as one step forward, two steps back, whereas a 3-box chart is one step forward, three steps back.

2-box charts apply a I -box filter in the direction of the current column, but a 2-box filter against the trend. For example, if you are plotting a 50 x 2 Point and Figure chart and the current column is an X column, every 50 point increase in price from the last box plotted is added to the X column. In order to change columns and reverse against the X column however, the price must fall by the value ofat least 2 boxes or 100 points. The converse is true if the current column is an 0 column. Any fall in price of 50 points results in a new 0 box, but the price must rise by the value of 2 boxes to change columns and plot a column of Xs.

In a similar way to 3-box charts, 2-box charts are giving more emphasis to the current trend, but only slightly more. This is what makes them favoured by short-term traders as you have seen. As with 3-box charts, the appearance of a new column in the opposite direction can be used as a trailing stop, where the stop is only 2 boxes away.

Other box reversals

As stated previously, there is no fixed rule about reversals. There is no reason why you can’t use a 7-box reversal chart provided you understand what this means. It means that the prevailing trend is of more importance to you than any reversal of less than 7 boxes. This means that you will not be alerted to a change in direction until there is considerable reversal against the trend.

The computer gives you the opportunity of experimenting with different box SIzes and reversals, which was not available to those early traders.

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Summary so far

Figure 2-35 below shows all four reversal methods constructed so far, using the same set of data. It is a good idea to look at them together and notice the differences.

xXXX

XXX0 XXXXXX0 XX X XXX0

X000X0X0 X0X X X0X0X X0X0X0XXX0X0 X0X0XX0

1 -box 3-box 5-box 2-box Figure 2-35: Example charts constructed using 1 -box, 3-box, 5-box and 2-box reversals

All these construction methods have assumed that tick data is available, although it is not a requirement as you will see later. The construction methods are summarised below:

1 -box reversal charts

I -box reversal charts plot every full box movement in the price in both directions.

Normally, a new column is started each time there is a reversal, except when there is a temporary reversal of I box only – called one-step-back.

I -box charts are the only charts that can have an X and 0 in the same column.
The value of the box – not the price – is taken into account when determining the next

plot.

•

•

3-box reversal charts

3-box reversal charts plot every full box movement in the price only if it is in the direction of the current column.

A new column is started each time there is a reversal of the value of 3 boxes or more.

X0

Price changes smaller than the box size are ignored.

There are no gaps on the chart. If the price gaps away, all boxes must be filled in.

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Chapter 2 – Characteristics and Construction Price reversals less than the value of 3 boxes are ignored.

3-box charts can never have an X and 0 in the same column, because the minimum number of boxes in any column is 3 .

•

5-box reversal charts

•

The value of the box is taken into account when determining the next plot – either the same column or the reversal.

Price changes less than the box size are ignored.

There are no gaps on the chart. If the price gaps away, all boxes must be filled in.

5-box reversal charts plot every full box price movement only if it is in the direction of the current column.

A new column must be started every time there is a reversal of 5 boxes or more. Reversals less than the value of 5 boxes are ignored.

5-box charts can never have an X and 0 in the same column, because the minimum number of boxes in any column is 5 .

The value ofthe box is taken into account when determining the next plot – either the same column or the reversal.

Price changes less than the box size are ignored.

There are no gaps on the chart. If the price gaps away, all boxes must be filled in.

2-box reversal charts

•

2-box reversal charts plot every full box movement in the price only if it is in the direction of the current column.

A new column is started every time there is a reversal of the value of 2 boxes or more. Price reversals less than the value of 2 boxes are ignored.

2-box charts can never have an X and 0 in the same column, because the minimum number’ofboxes in any column is 2.

•

The value of the box is taken into account when determining the next plot – either the same column or the reversal.

Price changes less than the box size are ignored.

There are no gaps on the chart. If the price gaps away, all boxes must be filled in.

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You may already be asking yourself, with four possible construction methods, which one do you use and when. This will be made clear in the coming chapters. At this stage, a few more aspects of construction need to be covered to ensure you have a full grounding in the subject.

The move from intra-day to end-of-day – the great

debate

Point and Figure charts are, and always will be, an intra-day charting mechanism. This surprises many students who often ask whether Point and Figure charts can be used with real­ time data. Only a lack of understanding of the Point and Figure method can prompt such a question. The answer is a resounding yes. It is where Point and Figure charts came from – the floor and the ticker – in the first place. For most traders and investors however, it is neither practical nor possible to plot all intra-day price changes, so the end-of-day Point and Figure chart was created.

It is unclear when end-of-day Point and Figure charts emerged, but in 1933, De Villiers and Taylor state that “Point and Figure charts compiled from the newspaper will rarely show completepatterns”. Theyadvise,therefore,thatitis”absolutelyessentialthatyourecordall ofthefullfigurefluctuations”. Alexander Wheelan is even more scathing about end-of-day data, condemning “the practice as being thoroughly unsound and unsatisfactory”, and advising readers that they would be “better offby using some other charting method instead of P o i n t a n d F i g u r e ” .

Both are too strong. Of course, taking every price change during the day will produce much more information on which to base decisions, but Point and Figure is not only a short-term tool. It is not just for traders, but investors too. It can and should be used for both medium­ term and long-term analysis as well. This being the case, it is just not practical to store tick data for every instrument for 10 or 20 years and then use that data to construct your chart. Besides the inconvenience of manipulating such a large amount of data, the management of so many prices across a wide range of instruments would be inconceivable. For example, many US stocks trade many times per second and each of these trades would have to be stored for the period you wish to draw the Point and Figure chart.

This means that there is a place for Point and Figure charts using end-of-day data, alongside the traditional intra-day tick data we have discussed so far. Most Point and Figure chartists use end-of-day data because of the expense and inconvenience of using intra-day tick data. Whilst on this subject, it should be noted that 1 minute, 15 minute, 30 minute, 60 minute or, in fact, any fixed time-frame data may be used as well.

This section however, will concentrate on Point and Figure charts using end-of-day data and how this affects the construction of the charts.

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One ofthe problems ofusing end-of-day data is that there are four pieces ofinformation with which to assess the day’s trading. How these are used greatly affects the resultant Point and Figure charts.

There are two customary ways to construct Point and Figure charts using end-of-day data: Close only method using end-of-day close price.
High/low method using daily high/low prices.

Close only method

Using the end-of-day close is now the most common method of drawing Point and Figure charts for medium term traders and investors. The method is simple and the data is easily obtainable from a variety of sources.

The end-of-day close price is used instead oftaking all the intra-day price changes during the day. The construction is the same as the intra-day charts we have constructed so far. In other words, you use just one price per day instead of a number of prices.

It is vital to understand that with end-of-day or daily Point and Figure charts you either plot Xs or Os each day. You cannot, under any circumstances, make any plot that results in an X and an 0 on the same day. The chart is drawn at the end of the day, taking the day’s close as the figure from which the plot will be considered.

Whilst the close only method provides some very satisfactory Point and Figure charts, some believe that they suffer from ignoring all the intra-day movement that may be important to the analysis. It’s a bit like using a line chart instead of a bar or candle chart.

Plotting close only end-of-day Point and Figure when data is being received in real­ time

An end-of-day Point and Figure chart means just that. It is constructed at the end of the day with the price at the close of the day; that is why they are called end-of-day or daily Point and Figure charts.

That is fine and easily understood, but there is confusion amongst those fortunate enough to have a real-time feed and hence real-time daily Point and Figure charts. In this case, when a daily or end-of-day Point and Figure chart is drawn, it uses the last price it receives during the day either to continue with the current column or to create a new column if the price reverses by the prescribed amount.

No matter how many prices are received each day, the Point and Figure chart is constructed by clearing any Xs or Os plotted so far during the current day, taking the chart back to where it was at the close of the previous day. Each new price is then considered as if it were the only

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Chapter 2 – Characteristics and Construction

7. If the low is low enough to plot a new 0, plot the ° using the low price and ignore

   completely the high for the day.

8. If the low does not yield a new 0, look at the high to see if there has been a reversal. If there is a reversal, then change columns (if required) and plot the required number of Xs.
9. If the low does not yield a new ° and the high does not result in a reversal, ignore the day completely.

What this effectively means is that trend always takes precedence over reversal when deciding whether to plot the high or the low.

The highllow method can be used with any reversal size, although it is most popular with 3 -box reversals. Because I -box highllow charts are not used that often, their construction has been placed in Appendix B for those who are interested to follow it through. You are probably saying to yourself ‘no more construction’, but don’t worry – this is the last one.

Example of a 1 0 x 3 Point and Figure chart using high/low prices

Table 2-4 shows 50 highllow prices from which a highllow Point and Figure chart may be constructed. Because the prices are in the thousands you should use a box size of 10. This means that any movement less than l O is ignored. The chart will be called a l O x 3 Point and Figure chart (hIl), which means that each X and ° is worth 1 0 points and the reversal required to change columns is 3 boxes. The (hIl) tells the person looking at the chart that it is constructed with highllow prices instead of close only.

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Chapter 2 – Characteristics and Construction As before, the first thing you have to do is to decide whether the first box will be an X or an

o. It will be an X if the initial price trend is up and an 0 if the initial price trend is down.

Take note ofthe 1st high/low, 110011109, and look at the 2nd high/low, 1105/1102. If the 2nd high is 1 1 1 0 or higher then the first plot is an X. If it is not 1 1 1 0 or higher, then compare lows. Ifthe 2nd low is 1090 or lower, then the first plot is an O. Neither applies in this case, so the 2nd high/low is ignored.

Look at the 3rd high/low, 1 1 1 5/ 1 1 09, and apply the rule. The 3rd high is 1 1 1 5, which is more than 10 points higher than the first high, so the Point and Figure chart can be started by plotting two Xs in the 1 1 00 and 1 1 1 0 boxes, ignoring the 2nd price. You could also have started at 1 090, but this is not important.

Figure 2-36: Construction example of a 3-box reversal chart using daily high/low

The 4th high/low is 1 1 1 5/1 1 1 O. It is important when plotting high/low Point and Figure charts to have in your mind the figures you are looking for. You need the price required to continue the column and the price required to reverse it. In this case, you are looking for a high of 1 1 20 or higher to plot a new X, but if that cannot be done you are looking for a low, which generates a 3-box reversal. In this case, it is 1 080, which is 1 1 1 0 less 30. Neither occurs and the 4th high/low is ignored.

The 5th high/low is 1 12411 1 15 so an X may be placed in the 1 120 box (not shown).

The 6th high/low is 113111100 so another X is placed in the 1130 box and the low is ignored. See Figure 2-37 overleaf.

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1 1 60 1 1 50 1 140 1 1 30 1 120 1110 1 1 00 1090

Figure 2-37: Construction example of a 3-box reversal chart using daily high/low

The 7th high/low is 1 136/ 1 1 30. This does not produce a new X in the 1 140 box, nor does it produce a reversal, so the 7th price is ignored.

•

•

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The 8th high/low is 1 12911 1 15. This does not produce a new X in the 1 140 box, nor does it produce a reversal, so the 8th price is ignored.

The 9th high/low is 112911121. No new X and no reversal, so the 9th high/low is ignored.

The 10thhigh/lowis 112511113.ThereisnonewXandnoreversal,sothe 10thhigh/low is ignored.

The 11thhigh/lowis 114111134.ThisdoesproduceanewXinthe 1140box. SeeFigure 2-38.

Chapter 2 – Characteristics and Construction

Figure 2-38: Construction example of a 3-box reversal chart using daily high/low

The 12th high/low is 1122/1118. Your last plot was an X in the 1140 box. The high is not 1 1 50 or higher, so you must look at the low for a reversal down to 1 1 1 0. The low is

1 1 1 8, so no reversal takes place and the 1 2th high/low is ignored.

The 1 3th and 14th high/low are also ignored.

•

The 15th high/low of 1113/1108 does not produce a new X, so the low is checked and this does produce a reversal of three boxes and a new column of Os down to 1 1 1 O. See Figure 2-39.

Figure 2-39: Construction example of a 3-box reversal chart using daily high/low

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The 16thhigh/lowof1140/1136doesnotproducealower0,butthehighdoesproduce a 3 -box reversal and a new column of Xs is plotted up to 1 1 40. See Figure 2-40.

1 1 60 1 1 50 1 140 1 1 30 1 1 20 1110 1 1 00 1090

Figure 2-40: Construction example of a 3-box reversal chart using daily highllow

The 17th, 18th and 19th do not produce a new X, nor do their lows produce a new 0 and so they are ignored.

The 20th high/low is 1 1 1 21 1 096. The high does not produce a new X but the low does produce a 3-box reversal down to 1 1 00. See Figure 2-4 1 .

1 1 60 1 1 50 1 140 1 1 30 1 1 20 1110 1 1 00

1090

Figure 2-41 : Construction example of a 3-box reversal chart using daily high/low

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Chapter 2 – Characteristics and Construction The 21st high/low of 1096/1087 produces another O at 1090. See Figure 2-42 below.

Figure 2-42: Construction example of a 3-box reversal chart using daily high/low

The 22nd high/low of 1 105/1 1 00 does not produce a new 0, nor does it produce a 3-box reversal. Remember, you are looking for a low that is 1080 or lower, or a high that is

1 1 20 or higher. This means the 23rd and 24th high/lows can also be ignored.

The 25th high/low is 1132/1127. The low does not reach 1080 or lower, but the high does produce a new column of Xs up to 1 1 30.

Figure 2-43: Construction example of a 3-box reversal chart using daily high/low

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Figure 2-43 shows the chart after the first 25 prices. Because it is a 3-box reversal chart, it is more compressed than the I-box chart shown in Appendix B. Once again, you should complete the exercise. The finished chart should look like the chart in Figure 2-44.

Figure 2-44: Construction example of a 3-box reversal chart using daily high/low

You have now seen how to construct a 3-box, end-of-day Point and Figure chart using high/low data.

Plotting high/low end-of-day Point and Figure when data is being received in real­ time

The points made about real-time daily charts using close only on page 93 apply to high/low Point and Figure charts as well. Only one price, either the high or (not and) the low may be used to update the chart at the end of the day, so the issue of daily high/low Point and Figure charts using real-time data must be understood too.

When a daily or end-of-day Point and Figure chart is drawn in real-time, it uses the latest high or the low to either continue with the current column or create a new column, if the price reverses by the prescribed amount. No matter how many times the High and Low change during the day, the Point and Figure chart is constructed by clearing any Xs or Os plotted so far during the current day, taking the chart back to where it was before the open of the current day. Each new high or low is then considered as if it was the only price received, and Xs or Os are plotted – but not both. As with close only charts, it is impossible to plot both an X and an 0 on the same day. Some believe that the columns of Xs and Os should follow the high and low up and down during the day until the close. This is totally incorrect for a daily chart.

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Chapter 2 – Characteristics and Construction

A daily (end-of-day) high/low Point and Figure chart is constructed during the day by taking the current high or low, according to the high/low plotting rules and comparing it to the last X or 0 plotted prior to the open of the current day. This does, therefore, mean that an X or 0 could be removed from the chart later in the day. At the end of the day, when the market has closed, either the high or the low is used to plot X or an 0 on the chart, according to the high/low construction rules.

The only difference between this and a close only end-of-day Point and Figure chart is in the case ofthe high/low version, either the high or the low is plotted, because the close is ignored.

Problems with the high/low method

At first glance, the high/low method of plotting Point and Figure charts using end-of-day data seems to solve the problems of close only charts not taking into account the intra-day movements. The fact, as you have seen when constructing, is that the high/low method also has a problem, which occurs when the high and low both generate a plot. If you are plotting a column of Xs, the high takes precedence, so you must look at the high to see if it generates a new X. If it does, you plot that X and ignore the low.

But what if the high generates a new X and the low also generates a reversal column of Os? The rule says you must ignore the low even though it does produce a reversal. It is a problem, but it is insurmountable if you are using end-of-day data, for the simple reason that you do not know whether the high or low occurred first.

The converse is true if you are plotting a column of Os. In this case, the low takes precedence, so you must look at the low to see if it generates a new O. If it does, you plot that 0 and ignore the high. However, if the high and low are such that the low generates a new 0 and the high generates a 3-box reversal of Xs, you still have to ignore the high.

It is just as well to note that it does not occur that often, and if it does, there is usually a follow-through the next day confirming whether the high or low has taken control and a column of Xs or Os takes precedence.

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The Definitive Guide to Point and Figure

End-of-interval time-frame Point and Figure charts

There is a half-way house between tick Point and Figure charts constructed using every tick as it is received, and end-of-day Point and Figure charts which use a summary of the day’s trading, either end-of-day close or end-of-day high/low. A third type of data, called intra-day or interval data, is available, composed by summarising the data for a chosen interval – 1 minute, 5 minute, hourly, or any time-frame – into high, low and close for that interval. So, 1 minute interval data in an 8 hour day, would result in 480, high, low, close (HLC) packets, which represent the HLC for each minute. A 1 minute Point and Figure chart is then constructed using either the close at the end of each minute or the high/low each minute, giving a far more detailed chart than one constructed with end-of-day close or end-of-day high/low. This opens up a huge range of Point and Figure charts to use, because you could draw a 5 minute chart, a 10 minute, an hourly, or any intra-day time-frame you wish to nominate.

The advantage of these intra-day interval Point and Figure charts over end-of-day charts is that the direction of the price during the day is known. Depending on the interval time-frame chosen, the sequence in which the high and low are hit can be seen and charted. During a day, column changes can, and will, occur as new end-of-interval prices are received. Remember that it is not possible to have intra-day column changes with end-of-day Point and Figure charts as only one price per day is used to construct the chart.

Fixed time interval data like this is easier to store, because there is a fixed number of data points per day, so back data is far easier to obtain. Remember, there is a distinct difference between tick data and fixed interval time-frame data. Tick data has no fixed time interval. The busier the market, the more trades will go through and the more ticks will be received and plotted. Tick data is suited to Point and Figure charts because there is no fixed time interval. The data is plotted as it is received, with no regard to time. Interval data, even if it is 1 minute interval data, is received every minute, so your Point and Figure chart uses a summary ofthe ticks for that minute.

There are many Point and Figure purists who insist on using tick data only. Their commitment is to be applauded. If the data is available for the period you require, then tick data is the best. However, interval data is far easier to manage and the difference between 1 minute data and tick data is insignificant, especially if you use the high/low construction method.

Interval Point and Figure charts are not as detailed as tick Point and Figure charts, but they are far more detailed than end-of-day Point and Figure charts as they show the path of the price during the day.

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Chapter 2 – Characteristics and Construction Log scale Point and Figure charts

All the Point and Figure charts described so far have been constructed using a uniform box size. In other words, throughout the chart, the box value has remained constant. The chart is therefore an arithmetic scaled chart. In many cases, however, this is not suitable, especially where the price of the instrument has risen or fallen by large percentages.

Prior to the use of computers, Point and Figure analysts arbitrarily changed the size of the box at certain key levels to cater for large rises and falls. For example, they may use a box size of 0.5 when the price is below 50, then I when the price is between 50 and 1 00 and so on. There were no strict rules, but the attempt was to change the sensitivity ofthe chart as the price increased or decreased. This method does, however, create a number of problems:

It is too arbitrary.

The changes in box size are not smooth, but happen suddenly at specific levels.

Construction becomes much more difficult because box sizes are changing. This is especially so when plotting at the change-over level.

It is doubtful that trend lines across the change-over point are valid because of the step change in the box size.

Counts (discussed in a later chapter) are difficult to work out because the box values change halfway through the count.

It was in fact a sensible attempt at a log scaled chart without getting too deeply into complex mathematics. The advent of’personal computers for Technical Analysis has, however, allowed the construction of genuine log scaled Point and Figure charts.

In order to understand how to construct a log scale Point and Figure chart, you first need to understand the difference between log and arithmetic scaling.

On an arithmetic scale chart, the same vertical distance ( 1 0 boxes) throughout the chart equates to the same arithmetic difference in price – the same number of points – but a different percentage change in price.

On a log scale chart the same vertical distance (10 boxes) equates to the same percentage change in price but a different points change in price. In other words, 10 boxes at the top of the chart represents a different number o fpoints from 1 0 boxes at the bottom of the chart.

On an arithmetic scale chart, actual price changes are plotted, so the size of each box is the same throughout the chart.

On a log scale chart, each box has a different points size because they represent percentage changes.

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The Definitive Guide to Point and Figure

Each box being a different size does not mean each X and 0 is a different physical size, it means that each X and 0 represents a different points value.

To draw a log scaled Point and Figure chart, you must take the log of the starting price, then increment that logged valueI0 by an equal amount for each box. The amount you choose is decided by the percentage increase you wish to use. The price level for each box is determined by reversing the process – taking the anti-log or exponential ofthe logged figure. The price, therefore, increases by a fixed percentage at each box level. The percentage difference between one box and the next is dependent on the size of the increment in the logged value. What this means is that each X and 0 represents the same percentage change in price, although the percentage increase in price is marginally different from the percentage decrease in price.

To construct a log scale Point and Figure chart, therefore, you must choose a percentage box size rather than a points box size. For example, ifyou choose a box size of 1 %, this means that each box is 1 .0 1 times bigger than the previous. The log of 1 .0 1 gives you the logged box size of .00995. For more details on the construction ofbox values, please see Appendix C.

The result is a logarithmic chart and the effect is that each box size is always 1 % greater than the previous and each is 1 % of the current price; so at the 500 level the box size is 5 points, at the 1 000 level, it is 1 0 points and so on. In this way, you have a Point and Figure chart where the value of the XS and Os increases as the price rises and decreases as it falls.

Unless you have a computer to draw them for you, it is very difficult to construct these charts by hand and this is the reason why they were never attempted before personal computers made it easy. You will be relieved, therefore, that there is no construction exercise.

10 There are a number of ways to take the log of a value. The two most common being log base 10 and log base e, or In, as it is called. Appendix C explains how to construct a log scaled Point and Figure chart using In.

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Chapter 2 – Characteristics and Construction Instead of the physical box size, log scaled Point and Figure charts are named by the

percentage box size. A 1 % x 3 is a log scaled 1 % by 3 -box reversal chart.

Chart 2-1 shows a 2 x 3 chart ofVodafone pic, a FTSE 100 Telecoms stock, on an arithmetic scale. Throughout the chart, the value of each X and 0 is 2 points.

Chart 2-2 shows 1 % x 3 chart ofVodafone pic on a log scale. The chart has a 2% box size so every box throughout the chart has the same percentage value but has a different points value. At point A on the chart the box size is approximately 0.3, at point B it is approximately 0.98, at point C it is 7.2 and at point D it is 2.2.

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Chart 2-1 : 2 x 3 of Vodafone pic – arithmetic scale chart

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99.9%. Chart 2-3 shows a line chart ofMarconi on an arithmetic scale. No analyst would be able to analyse the share’s current position from the chart, so a log scale chart (Chart 2-4) would be used.

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The Definitive Guide to Point and Figure

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This is the same reasoning behind using log or arithmetic scale Point and Figure charts. Log scale Point and Figure charts are useful in the same way as they are when using line or bar charts. They tend to be used for long-term analysis or where there has been a large rise or fall in the price. It should be noted that the shape of log scale and arithmetic charts is different as would be expected with bar or line charts. Log scale charts show percentage changes whereas arithmetic charts show absolute changes. The easy way to think about it is that short-term traders are more interested in the points they make rather than the percentages, whereas longer-term investors are more interested in percentage returns.

Stops and log scale Point and Figure charts

One advantage of log scaled Point and Figure charts is that a reversal from a column of Xs into a column of Os is like triggering a percentage trailing stop. For example, in a 1% x 3 Point and Figure chart, a reversal of 3 boxes is equivalent to a 3% (actually 2.97%) stop loss being triggered from the last plotted X; a reversal in a 2% x 3 Point and Figure charts is

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