Point & Figure Tutorial, the basics
The 3boXreversaL P&F tutorial begins with Point and Figure basics. At the end of this page, and subsequent pages in the series, is a link to the next step, highlighted in blue. We suggest readers navigate through the pages one-by-one. After around six hours of study time you should be able to read Point and Figure charts like a pro!
To complement the learning process we strongly recommend taking out a free trial to our Point & Figure charting tool. The trial includes full access to our technical analysis research, past and present. Current reports are a great resource for observing Point & Figure in practice, as it unfolds in the stock market.
To begin, Point & Figure basics, the chart axes.
Point & Figure Chart Axes
At the most rudimentary level, the basic Point & Figure chart framework, consists of two axes. The X (horizontal) and Y axis (vertical).
P&F Y Axis - Price
Prices are plotted up the vertical axis (Y). The price axis may either be on the left or right, or even both. The position is down to personal preference - we prefer price on the left.
The price axis may be linear or log scale. The subject of axis scaling is explained elsewhere on the site and need not be understood at this early stage of the Point & Figure tutorial.
P&F X Axis?
The horizontal X axis is not the passage of time in Point & Figure charting. Contrary to popular belief.
Columns alternate vertically across the Point & Figure chart, left to right, due to price changes. Point & Figure rules ensure that there is no box movement when no significant price change has occurred. However, if a price change is large enough, a column direction switch is forced, from a down column to an up column, and vice versa. This will become apparent, and clearer, later in the tutorial series when the 3 box reversal Point & Figure rules are fully explained.
Conversely, conventional technical analysis charts, such as bar, line and candle, plot time evenly across their X axis.
Time on a P&F chart?
However, the passage of time may still be marked on a P&F chart. The year may be annotated along the X axis. When a year change occurs, the year may be noted just under the X axis, beneath the column where the most recent box has been filled. Bear in mind, year graduation lengths will not be constant. Infact, it is possible for one column to span multiple years. Likewise, months may be noted, inside the actual columns, replacing an X or O. A column may span multiple months. Basically, no box movement means many months can be skipped as the price remains stationary, despite the passage of time.
What is a P&F box?
With the axes explained, the Point & Figure tutorial now progresses to the next key component of the charts, the boxes.
One unit of price is represented by one box on a Point and Figure chart.
Lower down the page, our worked example keeps things simple for the purpose of the P&F tutorial.
1 BOX = $1
One box represents one dollar, in the range from $20 to $100, under the P&F rules stipulated by Chartcraft. The Chartcraft scale is the industry standard for regular priced stocks, such as members of the Dow Industrials.
Scaling is explained further on the box size article in the Q&A area. However, at this stage in the Point & Figure tutorial, focus remains on the P&F basics, and the core P&F rules.
X in P&F?
In Point & Figure charting, the letter X marked in a box indicates trading has risen into that unit of price.
On the diagram above, the letter X has been placed in the box representing $25. Therefore, the price has touched a high of at least $25.00 but not more than $25.99. Under Point & Figure rules, should the price only reach a high of $24.99, the $25 box would not have been filled with a letter X.
Moving to $26.05 would fill the $26 box, as illustrated below.
A fundamental Point & Figure rule is that fractional prices must be rounded down to the nearest box value when marking a column of Xs. Therefore, $26.02 would be rounded down to $26, as would $26.99.
O in P&F?
A Point & Figure chart box marked with the letter O indicates trading has fallen into that unit of price.
In the diagram above, the box filled with a letter O indicates the price has travelled down through $30, from $31.
To fill the $30 box, a low of $30 was needed, $30.50 or even $30.01 would have not been enough to mark an O in the $30 box. A low of $29.90 would have enabled the $30 box to be filled.
However, a low of $29.90 would not have been enough to fill the $29 box. In order to fill the $29 box with an O, at least $29.00 would be needed, as illustrated below.
Point and Figure rules dictate that fractional prices should be rounded up to the nearest box value when marking a falling column of Os.
X and O Columns?
With the axes, plus the meaning of the letters X and O marked in a box explained, next in the Point & Figure tutorial, we explain columns.
Vertical columns of Xs and Os alternate on a Point & Figure chart.
X column depicts a rising price trend. The X column can only ever travel upwards.
A stock is in demand when buyers exceed sellers. Thus, a rising X column represents demand for a given stock.
Conversely, a column of Os indicates more sellers than buyers, a downtrend.
The O column can only travel downwards.
In the case of an O column, an over supply of the stock exists. As a result, a falling price trend manifests, termed supply.
A column of Xs or Os will hold their direction until there is sufficient price movement in the opposing direction to trigger a reversal.
Switching of column direction is governed by a set of P&F rules, namely the 3 box reversal system. A process covered on a later page in our Point & Figure tutorial series.
How to read Point and Figure charts accurately?
Well, the first step is to learn the P&F basics, adhering to the principles of the approach. As such, bad habits and poor analysis, are avoided further down the road. It is vital Point & Figure rules are adhered to. Otherwise, subsequent analysis and forecasts prove meaningless.
Therefore, next in the Point & Figure tutorial we explain how to plot Xs and Os, chart construction, utilizing the P&F basics learnt above.
Paper and pencil
End of day data is all that the Point and Figure investor needs to plot charts. The highs and lows of the day are used to plot new price movement, if any. Traditionally, changes were marked on a piece of graph paper with a pencil.
The necessary price data may be simply gleaned from a financial newspaper or their equivalent website, such as the Wall Street Journal or Financial Times. Yahoo Finance is also a great resource as the data is laid-out clearly.
Point & Figure chart construction itself, the plotting of Xs and Os, is best learnt by manually completing the process the traditional way. Paper and pencil.
Learning the old fashion way
To begin, a user of our chart service should select their favorite stock on the 3boXreversaL tool. Ensure the chart has the correct default settings (3 box reversal, high/low data, Chartcraft scale). Print the chart onto paper. Then, each day mark the X and O activity following the session close, with a pencil.
Daily price changes (high, low, close) are all listed in the data table beneath the chart on the 3boXreversaL website. When collating the data just be sure not to cheat – do not look at the already updated Point & Figure chart!
Following manual entry onto the piece of paper, compare the result against the chart on the 3boXreversaL tool. Should the entry on the paper differ, look for the reason why. This process can be repeated daily until the process of plotting Xs and Os is fully understood.
Point & Figure Rules
In order to mark charts by hand, the P&F rules below need to be adhered to. Although our online charts automatically complete this process for the subscriber, to gain all the benefits of Point & Figure, the mechanics should be understood. Only then, can market emotion behind price movement be felt. In turn, leading to better investment decisions.
- Ensure columns alternate, from a column of Xs to a column of Os, to a column of Xs, and so on.
- Plot only Xs in the column for Xs.
- Plot only Os in the column for Os.
- Note, the only time a character other than a X or O will appear in a column is when a month change has occurred, in which case the month number may be entered.
- Plot less than three Xs or three Os in a column. Anything less than three is incorrect or a reversal method other than the 3 box reversal is being used (e.g. 1 box reversal).
- Never allow a column to contain Xs and Os in the same column.
- Point & Figure end of day charts can never move more than one direction per day. Either up or down per session, and that is it.
Plotting an uptrend - X column
- A column of Xs means a rising trend and that takes precedence when marking boxes.
- Following the market close, take the high of the day, then round it down to the nearest box size. Marking the box with an X (providing it has not already been filled).
- If a new high is achieved, enough to fill a fresh X, then that is all that can be marked for the session (even if the low of the day was enough to reverse the chart down).
- If no fresh X was filled in the current column, then look at the value for the session's low. A value greater than 3 boxes away will trigger a column shift in the opposing direction via the 3 box reversal method. Note, the methodology of reversals is covered later in our Point and Figure tutorial.
Plotting a downtrend - O column
- When the present direction is a falling column of Os, that takes precedence with regards box marking.
- Post market close, take the session low, round it up to the nearest box size. Mark the box with an O (providing it has not already been filled with an O).
- If a chart is currently in a column of Os and a new low is made, enough to fill a fresh O, then that is all that can be marked for that day (even if the high of the day was enough to reverse the chart up). The 3 box reversal up will print on the next session providing the P&F rule is fully satisfied.
- If no fresh O was filled in the current column, then look at the value for the session's high. A value greater than 3 boxes (3 box reversal method) will trigger a column shift up, to a column of Xs.
- P&F end of day chart moves are typically calculated using the high and low of the session.
- The closing price alone may be used for P&F chart construction, though it is not considered as effective. Highs and lows of the day reflect emotional extremes - valuable information to the analyst.
How to use Point & Figure?
Our video presentation below analyzes the Dow Industrials and its components. A case study of how to use Point & Figure charts in practice. A taster, of how P&F can be used once mastered.
Navigating through P&F charts one-by-one is an effective means to gauge condition of a sector or index. The video case study above, explored the Dow 30. With each chart, insight was provided on how to read Point and Figure charts. As little as one minute per chart is sufficient. Studying the stock's trend, identifying patterns and signals, consulting the relative ratio chart, and so on, can all be covered swiftly. The material discussed only touches the surface but certainly provides the Point & Figure basics of market analysis.
Surfing through charts over a coffee, fine tuning settings, drilling down through sectors, is not only captivating, but also a great way to learn the mechanics of Point & Figure charting. If you have not already done so, we wholeheartedly recommend a free trial to our charting service.
Select an index, or sector of interest, then leisurely surf through the constituents. Clicking on Next, top right of the chart, plots the next member. Your favorite Point & Figure settings are retained as traveling from one chart to the next.
The order by which members can be scrolled may also be controlled. For instance, charts could be scrolled in order of greatest daily gainers, or year to date losers, perhaps those on buy signals, and so on. To dictate the scrolling order, sort the stocks in the table by clicking on column headings, that sorts the table rows beneath. Then simply click on the first chart in the list and navigate through the group via the Next button.