Point and Figure construction 3-box

Next, there are 3-box reversal charts. 

Soon after Point and Figure became popular there came a need for a less sensitive chart. The 3-box reversal chart, sometimes called 3-box minimum reversal chart, was the answer. They are not a substitute for 1 -box charts, but rather a complement to them.

A 3-box reversal chart means exactly what its name implies. A change from an X to an 0 or an 0 to an X is only undertaken if the price reverses (changes direction) by the value of at least 3 boxes. lt effect gets rid of minor reversals during a prevailing trend. 3-box charts, therefore, give more weighting to the prevailing trend. The chart can never have less than 3 Xs or 3 Os in any column and, consequently there can never be an X and 0 in the same column, so no one-step-back exists in 3-box charts.

Unique asymmetric filter

3-box charts consider the value of 3 boxes when a reversal is being determined, but the value of 1 box when a continuation of trend is being determined. This gives greater weighting to the prevailing column and hence the trend. This is a unique feature of Point and Figure charts where the reversal size is greater than 1.

Consider the value of the box

It is important to note that when attempting to establish a reversal (change in columns), the value of 3 boxes is calculated from the last plotted box and not from the last recorded price. For example, if you are plotting a 10 x 3 chart and the last price in a rising market (a column of Xs) is 547, you would place an X in the 540 box. Once this is plotted, the figure of 547 is discarded and the value of the last box (540 in this case) is retained. So, in order to change columns and plot a column of Os, the price must reverse by at least 30 (10 x 3) points from the last plotted box, which means the price must reach 540-30 = 510, not 547-30 = 517. 

3-box reversal charts 

• 3-box reversal charts plot every full box movement in the price only if it is in the direction of the current column.
• A new column is started each time there is a reversal of the value of 3 boxes or more.
• Price reversals less than the value of 3 boxes are ignored. 
• 3-box charts can never have an X and 0 in the same column, because the minimum number of boxes in any column is 3.
• The value of the box is taken into account when determining the next plot - either the same column or the reversal. 
• Price changes less than the box size are ignored. 
• There are no gaps on the chart.
• If the price gaps away, all boxes must be filled in.

5-box reversal charts

• 5-box reversal charts plot every full box price movement only if it is in the direction of the current column. 
• A new column must be started every time there is a reversal of 5 boxes or more. 
• Reversals less than the value of 5 boxes are ignored. 
• 5-box charts can never have an X and 0 in the same column, because the minimum number of boxes in any column is 5.
• The value of the box is taken into account when determining the next plot - either the same column or the reversal.
• Price changes less than the box size are ignored. 
• There are no gaps on the chart.
• If the price gaps away, all boxes must be filled in.

2-box reversal charts

• 2-box reversal charts plot every full box movement in the price only if it is in the direction of the current column. 
• A new column is started every time there is a reversal of the value of 2 boxes or more. 
• Price reversals less than the value of 2 boxes are ignored. 
• 2-box charts can never have an X and 0 in the same column, because the minimum number' of boxes in any column is 2.
• The value of the box is taken into account when determining the next plot - either the same column or the reversal
• Price changes less than the box size are ignored. 
• There are no gaps on the chart.
• If the price gaps away, all boxes must be filled in.

The move from intra-day to end-of-day -

Point and Figure is not only a short-term tool. It is not just for traders, but investors too. It can and should be used for both medium term and long-term analysis as well. This means that there is a place for Point and Figure charts using end-of-day data, alongside the traditional intra-day tick.

One of the problems of using end-of-day data is that there are four pieces of information with which to assess the day's trading. How these are used greatly affects the resultant Point and Figure charts.

There are two customary ways to construct Point and Figure charts using end-of-day data:

Close only method

Close only method using the end-of-day close is now the most common method of drawing Point and Figure charts for medium term traders and investors. The end-of-day close price is used instead of taking all the intra-day price changes during the day.

High/low method

High/low Point and Figure charts are more difficult to construct than close only charts, but the rules are relatively straight forward. Step through each point below:

l. Take note of the direction of the current column. Is it an X or 0 column?

2. If the column is an up-column (you are in a column of Xs) then look at the high for the day you are about to plot.

3. If the high is high enough to plot a new X, then plot the X using the high price and ignore completely the low for the day.

4. If, however, the high does not yield a new X, look at the low to see if there has been a reversal. If there is a reversal, then change columns and plot the required number of Os.

5. If the high does not yield a new X and the low does not result in a reversal, ignore the day completely.

6. If instead the column is a down-column (you are in a column of Os), then look at the low for the day you are about to plot.

7. If the low is low enough to plot a new 0, plot the ° using the low price and ignore completely the high for the day.

8. If the low does not yield a new 0, look at the high to see if there has been a reversal. If there is a reversal, then change columns (if required) and plot the required number of Xs.

9. If the low does not yield a new ° and the high does not result in a reversal, ignore the day completely.

What this effectively means is that trend always takes precedence over reversal when deciding whether to plot the high or the low.