# Point-and-Figure Charts

The point-and-figure (P&F) chart is different from other chart types in that volume and time are unimportant and, thus, not charted. Only the price matters, and only if it is a significant amount. Price increases are recorded as columns of X's and decreases by columns of O's on a graph with price increments displayed along the vertical axis. Time is usually displayed on the horizontal axis, but not in a proportional amount, but rather discontinuously, because a single column of X's or O's could span days, weeks, or even months.

The amount by which a price must differ from the last price before it is recorded is known as the box size. A box is also often called a point, hence the name of the chart. All prices are recorded as multiples of the box size; any fractional component is dropped. So if the box size is \$1 and a stock rises by more than \$1 to \$15.99, then the price is marked as an X at the \$15 level; it is not rounded up to \$16.

Box size is determined by both stock price and volatility — the greater either is, the bigger the box size. Typically, box sizes vary from \$0.50 for cheap stocks to several dollars for more expensive stocks. The box size may even change in the same graph if prices span a large interval. However, the trader can choose the box size that best suits his needs. Any price changes that are less than the box size are not recorded.

If the high price increases by at least the box size, and the current column is an X column, then an X is recorded above the top X for each price increment equal to the box size. So if the box size is \$1 and a stock has a high that is \$2 higher than the last recorded X, then 2 X's are added to the top of the column. Note that the last recorded price may not have been for the last trading session — it could have been several weeks before if there was no price increases greater than the box size in the interim.

If the low of the day exceeds the box size, then it is added to the bottom of the O's if the current column consists of O's — in other words, the stock is in a downtrend. However, if the current column is an X-column, then a new column will be started to record the O, but only if the price decrease exceeds the reversal amount. The 1st P&F charts used a reversal amount equal to 1 box size. These are called 1-box reversal charts to distinguish them from the newer and simpler 3-box reversal charts (aka 3-point reversal charts), where the reversal amount was equal to 3 box sizes. So a price change in the opposite direction that exceeds the box size but less than the reversal amount would not be recorded.

While point-and-figure charts have less information than other chart types, this was considered an advantage, since it allowed the trader to focus on price action, which is considered the most important parameter by traders using technical analysis. By eliminating much of the noise of daily price fluctuations, patterns were simpler to spot and to interpret.

Point-and-figure charts were first used in the early part of the 20th century, and were probably created because they were easier to record by hand on graph paper, which was a necessity before computers. Volume was not available in the early years of stock trading and most investors only had daily access to prices published in newspapers. Since P&F charts were quick and easy to draw by hand, more of them could be maintained to cover different stocks. Then traders started to see patterns, and used them for forecasts and trading signals.

## Trendlines, Support and Resistance, and Patterns in 3-Box Reversal Charts

On 3-box reversal charts, by convention, trendlines are usually drawn only at 45 angles, connecting a high X with the adjacent O or by connecting a low O to the diagonally adjacent X, then extending the line. There are some treadlines in the Microsoft chart above.

Support and resistance lines are drawn horizontally. Support lines are drawn connecting bottom O's, while resistance lines are drawn connecting top X's.

There are 8 standard patterns for 3-box reversal charts. The most common and simplest patterns are the double top, double bottom, triple top, and triple bottom. There are also some other patterns that are used in other chart types, such as the head and shoulders pattern. Below are some of the these simple patterns. The simple patterns are much more frequently identified and are usually more reliable. You can see some of these patterns in the Microsoft chart shown at the top of this page.

Double TopDouble BottomRising BottomDeclining Top
XXOXOXXXOX
XOXOXOOXOXXOXO
XOXOOOXOXOXO
OOSellOXOOO
OOSell
Breakout of Triple TopBreakout of Triple Bottom
XXXOXOXO
XOXOXOXOXO
XOXOXOOO
OOOSell
Ascending Triple TopDescending Triple Bottom