Point and Figure Charts

How Point and Figure Charts Work

Understanding how a P&F chart is constructed is essential to interpreting its signals. The chart is built using two primary settings: the "Box Size" and the "Reversal Amount." The Box Size determines the minimum price movement required to add a single "X" (for rising prices) or "O" (for falling prices) to a column. For example, if you set a $1 box size, the price must rise by at least $1 above the current "X" before a new "X" can be added. The Reversal Amount—most commonly set to three boxes—determines how much the price must move in the opposite direction before the chart switches columns and starts a new trend. The process of "The Switch" is what gives P&F charts their trend-following characteristics. If a stock is currently in a rising column of "X"s and the price begins to fall, no new marks are made on the chart until the price drops by the full reversal amount (e.g., $3 if the box size is $1). Once this threshold is met, the trader moves one column to the right and begins a new column of "O"s starting one box below the highest "X." This rigid structure ensures that columns only change when a significant shift in sentiment has occurred. This mechanical nature removes the subjectivity often found in other forms of technical analysis, such as drawing trendlines on a candlestick chart. Because you stay in an "X" column as long as the uptrend remains dominant, the chart effectively keeps you in winning trades and prevents you from being "shaken out" by minor, insignificant market fluctuations.

Important Considerations: Box Sizes and Reversals

While P&F charts offer exceptional clarity, choosing the correct settings is vital to their effectiveness. The choice of Box Size depends entirely on the volatility and price of the security being analyzed. A stock trading at $500 per share requires a much larger box size (perhaps $5 or $10) than a stock trading at $20 (perhaps $0.50). If the box size is too small, the chart will become cluttered with too much "noise," defeating its primary purpose. If the box size is too large, the signals may arrive too late to be actionable. Most professional P&F analysts use a "traditional" scaling method or an "ATR-based" (Average True Range) method to automatically adjust the box size based on market conditions. Traders must also be aware of the "Reversal Amount," as it dictates the sensitivity of the chart. The industry standard "3-box reversal" is designed to filter out pullbacks that are likely just temporary corrections within a larger trend. However, some aggressive traders might use a "1-box reversal" for a more granular view, though this significantly increases the number of false signals. Furthermore, it is important to remember that P&F charts ignore volume entirely. While price action is the ultimate indicator, some traders feel that the lack of volume data makes it harder to gauge the "conviction" behind a breakout. To mitigate this, many P&F practitioners use the charts for long-term trend identification and support/resistance mapping, while relying on other time-based charts or oscillators for precise entry and exit timing.

Interpreting the Chart

Breakouts: A "Double Top Buy" signal occurs when a column of Xs rises above the top of the previous column of Xs. This signals demand has overcome resistance. Breakdowns: A "Double Bottom Sell" signal occurs when a column of Os falls below the bottom of the previous column of Os. Support/Resistance: Because P&F charts are built on grid lines, support and resistance levels are extremely clear and unambiguous horizontal lines.

Point & Figure vs. Candlestick

Comparison of the two charting methods.

The Bottom Line

P&F charts are the "silent" chart. Point and Figure charts are a timeless method of price analysis. Through ignoring time and minor volatility, they distill market action down to its essence: the struggle between buyers and sellers. While they take some getting used to, they are powerful tools for long-term investors who want to avoid getting shaken out by short-term market noise. They provide clear, objective signals for entry and exit based purely on significant price changes.