Point & Figure Boxes Explained
Point & Figure box size refers to the price value of a box on the grid of a chart.
Box size values are marked up the vertical Y axis of a Point & Figure chart. Therefore, boxes marked with an X or O in the row adjacent to the indicated box size on the Y axis, have seen trading through that price value.
Point and Figure Scale
Point and Figure scale refers to the graduated box sizes up the Y axis. The scale may be linear or logarithmic. For example, Chartcraft semi-log scale, the industry standard, is a combination of both.
The choice of Point and Figure scale is down to the user's preference. The chart user, or technical analyst, sets the box size. Choice of scale is dependant on trading frequency.
Screenshot below is of our Point and Figure charting Tool. Microsoft is the stock plotted, with the scale set to Chartcraft Semi Logarithmic. Scale settings may be adjusted on the tool. For example, fixed at 1%, a linear scale.
The Box Size and Price Movement relationship
Chart price movement sensitivity is determined by the Point and Figure scale. Therefore, large box sizes see little movement across a specific price region on a Point and Figure chart. Alternatively, small box sizes on the Point and Figure scale around the same region experience greater price movement.
The Large Box effect
Below we have applied a linear P&F scale of $4 per box to the Microsoft chart. The result, less box movement. Therefore, during a rising trend a full $4 is needed to fill the next upside box. Additionally, in the case of a trend reversal, using our preferred 3 box reversal method, a $12 price change is needed. As a result, the screenshot shows twenty years of price movement, from 1999 to 2019. Great for long-term investors. However, the chart is of no use at all to a day trader! The latter requires a significantly smaller Point and Figure box size.
The Small Box effect
Below we have set the Microsoft box size on our chart tool to 25 cents per box. Consequently, more price movement is plotted on the Point and Figure chart, due to the the smaller box size. Five months of trading activity appears on the chart. An investor with short-term horizons would favor this set up. However, a long-term investor would see no value in this tight Point and Figure scale. Daily market swings have no relevance to long-term investing.
Chartcraft Semi-logarithmic Scale
The traditional method of P&F box size scaling has been adopted by 3boXreversaL. The Chartcraft semi-log scale, created over 70 years ago, has become the industry standard.
Box size increases, by predetermined increments, as the price rises through defined bands on the Chartcraft semi-log scale. The scale is set in such a way that a box value of $1 per box is the most frequently seen. Essentially, most major stocks, trade between $20 and $100, such as the Dow Industrial constituents.
From the 1960's, through to 1980's, a stock price above $100 was incredibly rare. However, a stock like Google, at the time of writing in 2019, trades around $1200. Therefore, the final three box size bands above, are values we assume the Chartcraft semi-log scale of old would have designated.
Thomas Dorsey, of Dorsey Wright Associates, now the NASDAQ DWA research platform, also followed the Chartcraft box size system. Other P&F chart providers also adopted the Chartcraft scaling.
Why do box sizes need to follow a logarithmic scale?
Chaotic swings are avoided through the use of graduated PnF boxes. If box sizes were fixed permanently at $1, the Google P&F chart would be excessively noisy. Too much movement results in meaningless patterns and signals. In short, market noise is filtered out by well appointed box sizes.
Alternative Box Scaling Methods
Chartcraft semi-logarithmic scale is the default setting on our Point and Figure charting tool; the traditional method of box scaling. Alternative methods are described below.
Fixed Box Size
A linear Point and Figure scale may be used where each box has the same value. For instance, a value of $1 per box, running from the start of the Y axis scale to the end. However, movement beneath $10 would be extremely limited, and movement above $1000 would be excessive.
Percentage Box Size
A box size set to around 1% of the current price. Indexes can trade in the tens of thousands. Therefore, a the box size of 1% may be applied successfully, rounded up to the nearest round number. In August 2018 the Dow Industrials trades at 25,000. Therefore, a box size of 250 provides a good fit, producing reliable signals. However, the downside, charts would be hard to read since box values are always going to be uneven.
Average True Range
The use of software programs to plot Point & Figure charts led to a new form of box scaling, Average True Range (ATR). The ATR box size system calculates the box size from the volatility of the stock price. The daily high and low for a given stock are compared against its prior close, with the volatility result for each day smoothed by a moving average, the 20 day average is common. Highly volatile stocks will have a large box size, a less volatile stock will have a smaller box size.
Disadvantages of Alternative Box Scaling methods
A major disadvantage of a set percentage box size and the ATR method, is box sizes end up being odd and obscure, with decimal places. As a result, interpretation of charts becomes messy, a headache. More importantly, it makes the process of learning and understanding Point & Figure price movement, unnecessarily complicated.
If you are a novice, learning the art of Point & Figure, we suggest you avoid ATR box size charts. Instead, keep it simple, use a $1 Point & Figure box size, looking at charts in the price range from $20 to $100. Dow members typically trade in this price range. Studying price movements, box reversals, patterns and signals, becomes so much easier and rewarding. Throwing decimal places into the learning process leads to confusion.
Final thought, Importance of Box Size Consistency
Once a choice of box size scaling is made, it is important to apply that system across all charts. That enables charts to be compared like-for-like. One box scale method produces totally different movement and signals to another box scale. On 3boXreversaL we use the traditional Chartcraft log scale to avoid inconsistent analysis and forecasting.