Construction with Xs and Os
We have learned from the characteristics of Point and Figure Charts that Xs are represented as an up movement in price and Os are represented as a down movement in price. In this section, we will learn how to construct point and figure charts by using Xs and Os.
Early Point and Figure charts were constructed with numbers or figures and then these numbers were replaced by Xs, which were eventually replaced with Os and Xs.
Up moves and down moves
Xs are used to indicate up moves in price and Os are used to indicate down moves. Using two different letters makes Point and Figure charts easy to interpret. You can instantly see the general trend, and within that general trend you can see the intermediate pullbacks against the trend represented by alternate columns of Xs and Os. Computer-drawn Point and Figure charts allow XS and Os to be drawn in different colours, normally blue or green for up and red for down.
Each X and 0 is given a sensitivity value before the chart is constructed. This is called the box size. It may be 1 point, 2 point, or it may even be 50 points. No matter what value is assigned, you may not plot an X or 0 until the price has reached the next interval. For example, if each X and 0 is 50 points, then the values of ascending Xs would be 50, 100, 150, 200 and so on. A price move from 50 to 99 would be ignored because it had not reached 100.
The reversal size is an important part of Point and Figure chart construction. It is the number of boxes required to change from a column of Xs to a column of Os or from a column of Os to a column of Xs. Depending on the type of Point and Figure chart you are drawing, the reversal size can be I-box, which is the original method, 3-box, 5-box, or any other value.
Point and Figure charts do not record gaps.
Demand and supply
As Point and Figure charts divide intermediate uptrends into columns of Xs and downtrends into columns of Os it is easier to understand if there is a buying pressure, or the demand, by the length of the column of Xs, or there is a selling pressure, or supply, by the length of the columns of Os.
Naming Point and Figure charts
Point and figure has two main aspects, the box size or the reversal size. The person looking at the chart needs these two parameters to understand the chart. A Point and Figure chart, where the box size is 10 and the number of boxes required to change columns is 3, is referred to as a 10 x 3 (10 by 3) Point and Figure chart. This convention leaves no room for doubt, when looking at a Point and Figure chart, as to what the box and reversal are. We will clear all your doubts while discussing 1-box & 3-box reversal charts and their construction in the subsequent units of this module.