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y development。 This。chapter highlights。the changes。to point and figure charts。during their first one hundred years。and discusses。the new thinking and interpretation of this。veteran strategy。
Point and Figure Charts： One Hundred Years of Change
Point and figure analysis。started life on the trading floors。and bucket shops。of the late nineteenth and early twentieth centuries； where traders。needed a method of recording prices。 They simply wrote down the traded prices。in columns； a rising column of numbers。as。the price rose and a falling column as the price fell。 It served simply as。a price record and ignored any fractions。 Eventually traders。began to notice patterns in their price records； and the record became known as。a figure chart。
Writing down numbers。was。a tedious。business； so traders。began to use a vertical scale and inserted Xs。instead of numbers。 The resultant chart became known as。a point chart。 For thirty years； figure charts。and point chartsexisted； with chat lists。referring to their point charts。and their figure charts； or their point and figure charts； the name we use today。 Figure charts。were eventually。dispensed with in the 1930s； and in the late 1940s； a new method of plotting the charts。was。proposed； using Xs。for the rising columns and Os。for falling columns。 Figure 8。1 shows。this。evolution。
The plotting method has。not remained constant either。 As。markets。and data availability。have changed； so too point and figure construction has。adapted and changed。 Originally； point and figure charts。were constructed from the tape using every trade。 The Xs。were assigned a value—called the box size—of one point； and any price change less than one point was。ignored。 When the price reversed by one point； a new column was。started。 This became known as。a 1…box reversal chart。 Because these charts。were very sensitive； a more condensed version was。sought； and many traders。transferred the data from their 1…box charts。to their 3…box charts； where the column did not change unless。the price reversal had the value of three boxes。 Some even drew 5…box reversal charts。to show the longer…term view； although these are rare nowadays； but 2…box reversal charts。are popular。 Figure 8。2 shows。charts。drawn with four different box reversals。 Notice how the look。of the chart is transformed as。the reversal is。changed。
Originally； all these charts。were constructed with tick。data； which meant that the trader had to have access。to even trade every。day。 This。task。was。not a problem for anyone updating a small set of charts。by hand each day； but it was。an impossible one for anyone who wanted to start a new chart showing five years。of tick。data。 In the late 1940s； therefore；
A。W。 Cohen of Chartcraft proposed a new construction method that ignored the tick。data； taking instead the daily。high or low to construct the chart。 His。method ignored 1…box reversal chartspletely in favor of 3…box； and so 1…box fell out of favor。 Because end…of…day data were bring used to construct the charts； this change turned point and figure into a method for longer…term analysis。
Today； end…of…day point and figure charts。are constructed with either the high or the low at the end of the day （Cohen's。method） or with the close at the end of the day。 What's。more； the ability of puters。to store vast amounts。of data has。allowed charts。to be constructed using data at the end of every minute； every hour； or any intraday timeframe desired。 Easy access。to tick。data has。resulted in the original style tick。point and figure charts。making a eback。as。well； although it is。still not practical to draw a five…year point and figure chart using tick。data for the simple reason that there is。now too much data to store。 All these changes； however； have made point and figure charts。suitable for all time horizons； from very short term to very long term。
With the popularity of 3…box reversal charts； many mon patterns have been identified and named。 Space here precludes。a full discussion of point and figure signals。and patterns； but it's。important to note that they are mostly based on breakouts。 If a column of Xs。rises。above the previouslumn of Xs。（see the 3…box chart in Figure 8。2）； that is。a basic point and figure buy signal。 If a column of Os falls。below the previouslumn of Os； that is。a basic。sell signal。 All point and figure patterns。are built from these two basic。patterns。 The wider they are and the more times。the price reaches the equilibrium level before breaking out； the stronger the subsequent signal。 Simple patternsbine to make more plex。ones； and point and figure analysts。always。look。to see whether these defined patterns。exist and if a smaller pattern is。part of a larger one。
Time Horizons
Before describing some new and innovative point and figure techniques； it's。important to review how time horizon works。in point and figure charts。 Changing the box size effectively changes。the time horizon of the chart without actually changing the underlying data。 To understand this； imagine you are day…trading the Dow Jones。Industrial Average。 Would you draw a point and figure chart with a 50 point box？ This。would mean 50 points in the direction of the column produces。a new box and 150 points。against the direction produces。a reversal and a new column。 A day trader could not possibly make money with such an insensitive chart； but a medium…term investor may be quite happy with a chart drawn with those parameters。 A short…term trader would be looking at perhaps。a 5 point or 10 point box size。 Thus； changing the box size does change the time horizon—though not the time frame—of the chart。 The smaller the box size； the more sensitive the chart； and the shorter the time horizon。 Typically； a point and figure analyst will look。at two； perhaps。three point and figure charts of the same instrument but with different box sizes。and/or reversals。to get a clearer picture of what is。happening。
Internal 45° Trend Lines
Trend lines。may be drawn in two ways on point and figure charts： either subjectively。bynnecting higher lows。for an uptrend or lower highs。for a downtrend； or objectively by。drawing trend lines。at 45° from highs。or lows。 These objective lines are most effective on 3…box reversal charts。and are rarely used on 1…box charts。 It’s。a unique feature of point and figure charts。because only point and figure charts。are drawn on a squared grid allowing the 45 lines to be drawn in the same position no matter what the aspect ratio of the chart。
The lines are drawn through the corners。of the boxes。from bottoms。and tops； providing what are called bullish support and bearish resistance lines。 They are the lines。that show the last level of support in an uptrend or resistance in a downtrend。 Evidence shows。that the price behaves。extremely well with these 45° lines； which are therefore used to determine major trend changes。 Consider what is。required to remain above a 45° trend line： The price must rise by at least five boxes。for even three that it falls； and if it can't do that； it can’t maintain a bull trend。 Similarly； to maintain a 45° downtrend； the price must fall by at least five boxes。for every three that it rises。
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ent reaction points。cl