3 Box Reversal?

Introduction

The 3 box reversal method is the core principle of traditional Point & Figure charting. Procedure encompasses a series of rules that must be followed in order for column direction, on a P&F chart, to reverse direction. The method's aim, to filter out day-to-day trading noise. 

Noise Filtering

Nearly every investor has a story about the big one that got away. Exiting a position prematurely has to be one of the most common trading mistakes. Let your winners run is often advised but easier said than done. Often a single volatile session is enough to shake out the nervous investor.

Fortunately, the Point & Figure 3 box reversal method, by nature of its mechanical movement, provides objective guidance. An investor following P&F direction will not fall prey to their emotion.

Largely, daily noise makes no appearance on a Point & Figure end-of-day chart. Consequently, an investor is not spooked out by volatile swings, as is the case on a line or bar chart. The P&F trend will remain intact, evident by a rising column of Xs, despite intraday price swings. Of course, should a stock swing 5% south in a session, the trend will likely reverse via the 3 box reversal method. Daily swings, to the order of a couple of percent, represent the noise level typically filtered by the 3 box reversal method.

3 Box Reversal Method Eliminates Trader Emotion

Emotionless, rule-based movement of a P&F chart, eliminates an investor's natural desire to act on their opinion. Consequently, the investor only trades when the Point & Figure chart dictates such. Trend direction, thanks to the three box reversal method, only reverses when the price change is meaningful, beyond the boundary of market noise.

Therefore, should a price change quantify as meaningful, the 3 box reversal actuates column direction to switch from up, to down, or vice versa. However, that alone, a 3 box reversal, should not be used as a reason to close out an investment or cover a short position. A subsequent breakdown signal, or breakout, is required, plus other technical factors on the chart will need consideration.

3 Box Reversal Explained

Direction on a Point and Figure chart, whether it be rising column of Xs or falling column of Os, will not change direction unless three boxes in the opposing direction can be filled.

There will never be less than three boxes in a column given the 3 box reversal rule. If there is, then the chart has been drawn incorrectly or another number box reversal method is being used.

Our background is from Chartcraft where the P&F 3 box reversal method had proven its reliability over some 60 years. Veteran Point and Figure analysts, Mike Burke and John Gray, were strong proponents. Many of Chartcraft's subscribers, lived by the system, many of whom were experts in the art of Point and Figure.

The Chartcraft three box reversal method is now accepted as the industry standard. Point & Figure utilizers, such as Dorsey Wright, now owned by the Nasdaq, follow the 3 box reversal technique as their default.

Next, we shall run through the steps to trigger a 3 box reversal.

Step-by-Step Tutorial

Learning the three box reversal rule is integral to constructing, understanding and analyzing Point & Figure charts.

In addition to reading through the tutorial steps lower down this page, we strongly recommended observing 3 box reversals day-to-day on charts in the real world. Thereby, accelerating the learning process.

Learning Resource - FREE Trial to our P&F Charting Tool

Our charting tool has a useful feature that enables a chart to be clocked back by a day or two, months or perhaps years. In fact, the chart may be displayed to any desired date in the past.

The Custom Date feature is used to select a specific date in the past. Clicking on the down arrow opens up a calendar and from there, a past date may be chosen.

By viewing a chart as it stood in the past, the relationship between daily fluctuating prices, and box movement, with respect to 3 box reversals, may be observed. A free trial to our charting tool enables access to this resource.

PnF Chart Tool custom date feature

In our research reports over the course of the week, we also highlight, and discuss, upcoming 3 box reversals of interest. Subscribers on a free trial to our P&F chart service have full access to this research - further material to aid the learning process.

3 Box reversal to the downside

We start the tutorial by explaining the steps involved to achieve a 3 box reversal to the downside. Steps are broken down into trading sessions.

Session 1 - Rising trend
  • Due to strong demand, the price of a stock climbs.
  • During the course of session 1, the price rises from an open of $25, to close at $29.05.
  • The rally results in Xs plotted in a rising column, as far as $29.
  • In a rising price trend, fractional prices are rounded down. Therefore, $29.05 is rounded down to $29. Hence, the $30 box will not be marked with an X.
Illustration of a P&F rising X column
Session 2 - Price drops but not by enough for a box fill
  • Supply begins to exceed demand. Basically, more sellers than buyers in the given market.
  • Price falls during the session, with a low of $26.80. However, the price weakness was not enough to cause any fresh box movement.
  • Four boxes need to be travelled in order for a 3 box reversal to the downside to be marked.
  • Therefore, in this case a move to $26.0 or lower, is needed to trigger the reversal down. That would enable an O to be entered into boxes $28, $27 and $26.
Session 3 - Three box reversal triggered to the downside
  • Supply intensifies, more sellers want out. Naturally, the price slips further.
  • To trigger a 3 box reversal down, the price must fall to $26.0 or lower (current box $29 - $3 = $26).
  • On session 3 the price falls from $26.80 to $25.85.
  • With the $26 level breached, the 3 box rule is satisfied.
  • A column of three Os are marked onto the chart. Box fills at $28, $27 and $26.
  • Note the box adjacent to the most recent X, in this case $29, must always left blank when marking a PnF 3 box reversal.
  • Therefore, the three box reversal method will appear as four boxes of travel, one empty box and then three marked boxes.
  • P&F direction is now confirmed as down due to the down column of Os.
Illustration of a 3 box reversal down.

Understanding the 3 box reversal rule is essential to grasp the edge that Point & Figure charting provides. Following P&F chart movements in the real market is the fastest way to learn the concept.

Reading our analysis and forecasts enables a novice to fast become skilled. Our charting tool automatically plots the 3 box reversals and these may be observed instantly by toggling the custom date feature on the tool. Research, and the tool, are both included in a free trial.

3 Box reversal to the upside

An upside 3 box reversal is the above steps for the downside reversal turned on their head. Repeated, albeit in the opposite direction.

Session 4 - No box movement
  • Supply remains dominant. More sellers of the stock than buyers.
  • Price falls from $25.85 to $25.10, closing at the session low.
  • Rules stipulate, that when current direction is down, the low of the session ($25.10) must be considered first, checking to see if the drop is large enough to fill a fresh box. Note we are ignoring the session high for the purpose of the exercise.
  • Point & Figure Rules also state that fractional prices for session lows are rounded up to the nearest box size.
  • Therefore, $25.10 is rounded up to $26. The $26 is of course already filled.
  • Only a move to $25.0 and under would fill the $25 box.
  • To conclude, session 4's price drop was just market noise. The fall was insufficient to cause fresh box movement.
No box change due to an insufficient price change
Session 5 - Price climbs but not by enough for a 3 box reversal up
  • Selling pressure alleviates. Demand begins to exceed supply.
  • The price rises from session 4's close of $25.10 to close at $27.55.
  • No new low was made during session 5. The intraday high of the day registered at $28.95.
  • Remember, present direction is down and rules state we should first consider the session low. The low ($25.10 was also the opening price) was not enough to cause any fresh box fill to the downside.
  • Next, the high of the day is considered, $28.95.
  • $28.95 is a fractional number and the rules state that the session high should be rounded down to the nearest box size. Therefore, $28.95 rounded down, results in $28.
  • The rounded down number of $28 was not enough for a 3 box reversal up. To activate, $29.0 was needed at least (current box of $26 + $3 = $29).
  • Therefore, no fresh box fills resulting from session 5's price activity.
Insufficient price change causes no change in trend.
Session 6 - Three Box Reversal to the upside
  • On session 6 the price opens down, with a low of $27.25. The prior session's close stood at $27.55. Supply is greater on the open - sellers are in the majority.
  • Buyers step in during the morning, demand then takes control. By the close, the price has risen to $28.99, with an intraday high beyond that level around mid-afternoon.
  • Considering the session low, looking for box movement. $27.25, the low of the day, was not enough to fill any downside boxes. $25.0 or less was needed.
  • The price close of $28.99 on session 6 was just shy of the $29 needed for a 3 box reversal up. However, it is the session high which is used to determine whether a PnF 3 box reversal can occur or not, not the closing value.
  • The session 6 high registered as $29.03. Rounding the fractional price down, as stipulated in the rules for price highs, provides $29. A value of $29 is enough to activate a 3 box reversal up.
  • Therefore, boxes at $27, $28 and $29 are marked with an X ($26 + $3 = $29).
  • Note the box adjacent to the O, from where the PnF 3 box reversal occurred, is left blank.
  • To conclude, despite a close under $29, the intraday high of session 6 at $29.03 was sufficient to print a 3 box reversal to the upside.
Illustration of the 3 box reversal up

3 box reversal across a level with box size change

Scale is a subject we discuss in greater detail in the Q&A section of the site. We suggest readers familiarize themselves with P&F log scales and then return to this section.

An overview of the required box move at separate levels of scale when using 3 box reversal Point & Figure:

  • The price scale between $0 and $5 has a box size of $0.25. Therefore, the price must move $0.75 (3 boxes x $0.25 box size) to achieve a 3 box reversal in either direction.
  • Between $5 and $20 the box size is $0.50. Therefore a P&F 3 box reversal occurs when the price moves in the opposing direction by $1.50 (3 x $0.50) or more.
  • From $20 to $100 the box size is $1. Therefore, $3 is needed. We used this box scale in our tutorial above.
  • Between $100 and $200, the box size is $2, therefore a 3 box reversal needs $6 (3 x $2).
  • The amount needed for a three box reversal continues to grow as the scale increases.

Therefore, a Point & Figure 3 box reversal across a level of scale change needs attention. Below we work through an example.

3 box reversal across scale change
Worked Example Across Box Scale Change
  • A stock price drops in a column of Os, ending with a box fill at $99.
  • To reverse back up from $99, if it were not for the scale change at $100 from $1 per box to $2 per box, it would need just $102 to reverse up ($99 + $3 = $102).
  • However, filling the chart to $102 would only fill two boxes ($100 and $102). Since, above $100 the scale switched to $2 per box, there is no box allocated to $101.
  • To fill the mandatory 3 boxes of the P&F three box reversal rule, across the change in scale, boxes to be marked with an X are $100, $102 and $104 (note the box adjacent to the O at $99 is left blank).
  • Therefore, from $99, the 3 box reversal across the change in scale at $100 needs $5 of movement ($99 + $5 = $104).
Scale changes filter noise

Although 3 box reversals and scale changes add a slight level of complexity when calculated by hand, the concept itself is beneficial. Levels at which the scale changes, such as $100, are often psychological round numbers, and as a result can be noisy and prone to traps. An upside breakout attempt, following a period of sideways column activity across a psychological level, needs additional follow-through to diminish probability of a false move.

Traders are understandably frustrated by whipsawing signals across psychological levels. However, the effect of a scale change, coupled to a 3 box reversal,  provides a greater degree of breakout confirmation, across levels of importance.

1 Box Reversal Method

On 3boXreversaL we use the 3 box reversal method. Experience over the years has taught us that this set-up works best for medium to long-term investing. The method is applied across all charts we analyze, ensuring consistency. However, not every investor or trader has the same time horizon.

Point & Figure charts using the 1 box reversal rule need only one box to be filled in the opposing direction to enable a reversal. The sensitivity of this method means charts are susceptible to noise and volatility which would otherwise not appear when using the 3 box reversal Point and Figure method. Nonetheless, some traders play volatility, enjoying the noise. However, signal quality would be poor due to the sheer volume of signals. Additional research, and information, beyond the P&F chart would be essential.

Charts on our website may be plotted using a 1 box reversal right through to a 5 box reversal. Default is the 3 box reversal. Click here for a free trial to our charting tool.

How to select a 1 box reversal method on charting software.

5 box reversal

Point & Figure charts based on the 5 box reversal method are slow to move. A chart could go months, perhaps years, without a change under the 5 box reversal set up. However, the method has its merits.

A full five box units in the opposing direction need to be satisfied before P&F trend direction can reverse. As a result, direction changes are infrequent. However, trend reliability is improved since greater confirmation is needed.

Patient long term investors certainly appreciate the value of the 5 box reversal method. Trends can remain in effect for many years.

Further Study

If you read the P&F basics page and then carried on through to the bottom of this 3 box reversal page, you are ready to move onto the more exciting stuff, signals!

Signals for the large part, are either breakouts or breakdowns. Incidentally, before learning all about the signals, please consider these two points whenever you spot a signal:

  • Consider the signal in the context of the big picture. A signal on its own is not enough to warrant action. Supporting evidence from the surrounding landscape of the chart, as well as the market climate, must be considered.
  • When a signal is supported by further evidence, take a step back and wait. Often, post signal, the price retracts, perhaps for a few days, maybe weeks. Providing the original signal still stands, not negated by a signal in the opposing direction, a more attractive entry window manifests.

Ok, with those thoughts in mind, next we suggest you learn how to identify the beautiful Point and Figure signals. To begin, the Double Top buy signal.