What is so different about Point and Figure charts is the fact, that they are based on price action solely.

The most common charts are line charts, bar and candle charts. They all have one thing in common: the Y-axis represents the price and the x-axis represents time. And it doesn’t matter if the price moved in a 500 pip range on one day or only a 50 pip range the other day. The chart will be updated every minute, every 5 minutes, every hour…

Point and Figure charts follow a different approach and are only updated if a major price movement did occur during a given timeframe. If the price did hardly move on one day, then the Point and Figure chart won’t be changed at all.

X’s and O’s

You should by now have seen a Point and Figure chart – if not, go back to the first page to see a Point and Figure Chart. The most prominent characteristic of a Point and Figure Chart is, that it consists of columns of X’s and O’s.

Each X or O is called a box. A column of X’s represents a rising market whereas a column of O’s represents a falling of price. Another view is that X’s represent demand and O’s represent supply.

Box size and reversal

There are two parameters for every Point and Figure Chart: the box size and reversal amount. These two parameters are responsible for the appearance of the chart.

The box size defines by how many points a price has to rise above the top of the current column of X’s, for a new X’s to be plotted on top of the column. Same applies to a column of O’s – the box size defines by how many points a price must fall below the bottom of the current column of O’s, before a new O will be attached at the bottom of the current column.

As long as the price makes new highs in a column of X’s, or new lows in a column of O’s, we will continue plotting new X’s and O’s in the current column.

For stocks the box size may be $1 or even up to $10 for higher listed shares. In forex, we measure price in pips and very common box sizes are 10, 25, 50 and 100 pips.

The reversal amount determines, when a new column will be started. By setting the reversal amount to a value of 3, the price has to fall or rise at least 3 times the box size before a new column will be started, headed in the opposite direction of the previous one. And it has to fall or rise 5 times the box size when we set the reversal amount to 5.

Remember: If the price makes new highs or lows and causes a new X to be plotted on top of the current column of X’s or a new O to be plotted at the bottom of the current column of O’s, we are finished with updating the chart – even if the price fell more than the reversal amount!

Example Construction of Point and Figure Charts

I will explain in detail how to create a Point and Figure Chart by hand. We are using end of day (EOD) data of EURUSD and taking the high and low values of each day to create our chart.

We will use a standard reversal amount of 3 boxes and define the box size as 100 pips.