Point and figure is a 120-year-old charting method. In fact, it is the oldest in the Western world; only the Japanese candlestick is older. Does that mean it is irrelevant in the digital age? I think not.
A LITTLE HISTORY
The foundations of point and figure charts were built in the late 19th and early 20th centuries by traders needing a quick and easy way to record price movement. They did this by recording the traded prices in columns, using a rising column of numbers to denote increasing prices and a falling column to denote decreasing prices. After a while, they began to notice patterns. So what started off as a price recording system became a charting method known as a figure chart.
As transcribing numbers became tedious, X’s replaced the numbers. The resulting chart became known as a point chart. For 30 years, figure charts and point charts coexisted with chartists referring to their point charts and their figure charts, or their point and figure charts, the name we use today. Figure charts eventually ceased to be used in the 1930s, and in the late 1940s a new plotting method using X’s for rising columns and O’s for falling columns was proposed and tends to be used today, although many still use the old method of just X’s (see Figure 1).
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PLOTTING POINTS
Point and figure charts are plotted by assigning a value, called the box size, to each X and O, and any price change less than this value is ignored. The value of the box size depends on the price range and what moves a trader wants to isolate. When the price reverses by the value of one box or more, the plot moves to the next column if this is necessary to accommodate the new plot. Sometimes a change of column is not required. Simply, if the last plot is an X and the box size (each X and O) has the value of one point, and the price falls by one point, you have to plot a O. If there is an empty square below the X in the current column (see Figure 2), you can plot the O there. Otherwise, you have to move to the next column to plot the O. This results in an X and O in the same column. This became known as a one-box reversal chart and is the original plotting method.
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As these were quite sensitive charts, a more condensed version, called a three-box reversal chart, was also used. For that, the price must reverse by at least the value of three boxes before changing columns (see Figure 2). Other reversals such as...