# Point and Figure Charts

## Key Points

• Point and Figure charts can help you track price activity quickly and efficiently.
• These charts depend solely on price activity for plotting which some traders consider to be of higher importance.
• We'll review the basic construction, scaling and settings of Point and Figure charts in StreetSmart Edge.

Point and Figure charts can be a useful way to help you identify broad price trends. In this article, we'll take a look at how these charts work and how you might incorporate them in your trading. We'll also walk through how to set up Point and Figure charts within StreetSmart Edge, including, the basic construction, scaling, and chart settings.

## Overview

While the origin of Point and Figure charts is not really known, based on research, we can construe that they have been around for over 70 years. Some have attributed Point and Figure charts to Charles Dow. What is clear, however, is that they have become indispensable to many traders as a way to track price activity quickly and efficiently.

If you are not already familiar with Point and Figure charting, the first thing you might notice is that time is not reflected along the horizontal axis (X-axis). Unlike other charts, where price plots along the horizontal axis as time lapses, Point and Figure charts do not factor in time. Instead, Point and Figure charts depend solely on price activity for plotting. As a result, I believe Point and Figure charts are a good method for helping identify trends while reducing the distractions that often accompany other charting methods.

In order to provide a reference point on the horizontal scale, on a daily chart, the numbers 1 through 9 are used in place of an X or O to denote the start of the month for January through September and A, B, and C are used to denote the start of the month for October, November, and December respectively.

The same holds true for weekly charts while monthly charts reflect the year with the ending number (i.e. 2008 = 8) in place of the X or O. For intraday charts, colored boxes are used to reflect the start of a day.

In addition, you might notice that the plotting is comprised of columns of Xs and Os. The Xs represent a sequential upward movement in price and the Os represent a sequential downward movement in price. Using these letters for up and down makes it easier to read and differentiate between directional trade activity.

## Box size

Also known as boxes, the Xs and Os are recorded within the box of a grid and are drawn when the price increases or decreases respectively by a predefined price interval. This predefined price interval is known as the box size.

The box size dictates the sensitivity of your chart. It doesn't matter whether you set your box size at .25 (1/4 of point) or 2 points, an X or an O will not be plotted until the price reaches the next interval. For example, if you have defined a box size of 2 points and the security goes up in price sequentially, the values would ascend in the following order: 2, 4, 6, 8, etc. A price move from 8 to 9.99 would not result in the plotting of an X because the full box size of 2 points was not reached. In that same vein, it is important to note that Point and Figure charts do not account for price gaps. If the price goes from 4 to 8, the chart would plot the X at 4, 6, and 8.

## Method

Ideally, all Point and Figure charts would be constructed off of tick-by-tick data. Unfortunately, this is not practical given the tremendous amount of tick-by-tick data that would be required.

As a result, the End-of-Bar Point and Figure chart was born. This type of chart can be constructed in two ways. The first method uses the closing price and the second method uses the high/low price.

If you use the first method, the closing price determines whether the plotting of a new X or O is warranted. While this works well, it doesn't take into account the high or low reached within the bar. This shortcoming was noticed by A.W. Cohen in 1948. He came up with the method that takes into consideration the high and low price reached within the bar.

To construct the Point and Figure chart using the high/low method you would first determine whether you're on an X or O column.

• If on an X column, look at the high to determine whether a new X should be plotted. If a new X is plotted, discard the low. However, if a new X is not plotted, check the low and determine whether there has been a reversal. If a reversal has occurred based on the low, then a new O column should be plotted. Otherwise nothing should be plotted.
• If on an O column, look at the low to determine whether a new O should be plotted. If a new O is plotted, discard the high. However, if a new O is not plotted then check the high and determine whether there has been a reversal. If a reversal has occurred based on the high then a new X column should be plotted. Otherwise nothing should be plotted.

## Reversal size

In addition to the box size, another factor which dictates the sensitivity of Point and Figure charts is the reversal size—the predefined number of boxes that the price must move in order to go from a column of Xs to a new column of Os (or from a column of Os to a new column of Xs). Traditionally, one would use a 1, 3 or 5 box reversal size.

The smaller the reversal size, the more sensitive the chart is to price fluctuations. Shorter term trends are better identified using a 1 box reversal size. If you're interested in searching for longer term trends, on the other hand, you might use a 5 box reversal size.

Another way to think of the reversal size is the number of boxes the price must move in order to for the price trend to switch columns. If your box size is set to 1 point and your reversal size to 3, then the price must move 3 points in the opposite direction to establish a new price column. However, if your box size is set to 1 and your reversal size is also set to 1, then the price only needs to move 1 point in the opposite direction to establish a new column.

That being said, the only reason a new column is created is because you can't have both an X and an O in the same box, as illustrated in the diagram below. Here, the price increases sequentially in the following order: 16, 17, 18, 19, 20, 21 and then goes back to 20, because a 1 box reversal has occurred so a new row is started with an O.

This is important because if you're using a traditional 1 box reversal method, there are circumstances where you could end up with an X and an O on the same row. This is called a one-step-back and can only occur when using a 1 box reversal.

Let's go through an example of how that might occur. Remember, new columns are generated as a result of not being able to place both an X and an O in the same box. With a one-step-back scenario you can continue a trend on the same column. Continuing with the previous example, if the price subsequently increases from 20 to 23, the next set of Xs could be drawn in the same column without being drawn on top of the existing O at the 20 box like this:

The one-step-back scenario is important as it may indicate a temporary retracement. As a result, you may want to wait for a second box to help identify the prevailing trend.

## Set up Point and Figure charts in StreetSmart Edge

Now that we've covered the box and reversal size, let's walk through how to set up a Point and Figure chart within in StreetSmart Edge.

Step 1: If you don't already have a chart open that you'd like to change to a Point and Figure chart, you'll want to start by clicking on "Chart" from the Launch Tools drawer on the upper-right corner of StreetSmart Edge. This will launch a new Chart Tool within the layout.

Step 2: From the Chart Tools drawer select the type of chart you'd like to use: monthly, daily, or intraday. Note: The Chart Tools drawer can be opened by clicking on the expansion arrow on the right side of the chart.

For purposes of our example, I'm going to use a daily chart.

Step 3: From the Style dropdown, select the Point and Figure option. You will then be presented with a set of Point and Figure settings where you can list the criteria.

Step 4: As Point and Figure charts plot discrete price movements, you'll want to define what value you'd like to assign to your Xs and Os. This can be done by either typing between .01 and 1000 or selecting a number from the box size drop down. While traditionally this value was 1 point, given the differing price fluctuations and prices between symbols, it makes sense to use a bit more discretion depending on the symbol you are charting. If you're tracking the Dow Jones Industrial Average, you'll want a larger box size, such as 100. If, however, you're plotting a security that's priced at around 13 per share, you would want to go with a smaller box size, such as .10 or .25.

Round numbers also may better reflect the psychological support and resistance levels used by other traders. As a result, you may want to consider number such as: .10, .25, .50, 1, 2, 5, 10, etc. If selecting a box size from the combo drop down as opposed to typing one in, you will notice that you can select ATR (Average True Range) as the box size. If selecting to use the Average True Range of the security as the box size, you'll also need to set the ATR Period which is the number of periods you'd like the chart to use in calculating the ATR.

Step 5: Select whether you'd like to use the high/low or close method. The close method will use the end-of-bar close price to determine whether a new X or O needs to be plotted while the high/low method will take into consideration the high and/or low of the bar to determine the plotting.

Step 6: Select the reversal size from the drop-down menu. As a reminder, the reversal size is the number of boxes that the price must retrace in order to reverse the trend from and increasing price trend of Xs to a decreasing prices trend of Os or visa versa.

## Recap

Let's review some of the key attributes associated with Point and Figure charts:

• Price is scaled on the vertical Y axis.
• There's no time scale along the horizontal X axis.
• These charts are constructed with Xs and Os as opposed to line or bars.
• Xs represent a continuous rise in price.
• Os represent a continuous fall in price.
• Xs and Os are called boxes.
• Every X and O represents a predefined price interval (also known as box size).
• A column of Xs changes to a column of Os (and vice versa) when the price changes direction by a given number of boxes (also known as reversal size).
• The one-step-back scenario, where both an X and O are on the same column, can only occur when using a 1 box reversal.
• Only price change at or above the box size are plotted.
• Volume plays no part in the construction or analysis of Point and Figure charts.
• Prices gaps are not reflected.

## Bottom line

Point and Figure charts can be a useful tool in technical analysis. Whether you're focused on identifying short-term or long term-price trends, these charts provide a good way to track and view historical market data activity.