Point and Figure charts - Explanation
Point and Figure charts consist of X and O columns, which reflect the filtered price changes. Increase in prices is shown by “X” boxes, and drop in prices is shown by “O” boxes. New boxes are created only in case of price change by the size of a box or more in one of directions.
As a result, each chart has a setting called “box size” – conventional unit of price movement direction, which is shown on a chart. Box size is an amount of pips, on which price should move above the current X box (or below the current O box) for a new Х (or О) box to be created and added to the chart. For example, if price increased by three conventional box sizes, it will be displayed on a chart like three X boxes.
If there is a reverse of price movement, a new column of O boxes will be displayed on a chart. This being said, X and О boxes never appear in one and the same column.
Besides, each chart has a setting called “reversal threshold”, which defines the amount of pips, necessary for a new column to be created and a chart to start moving in the opposite direction (downwards, if a previous column was the column of Xs, or upwards, if a previous column was the column of Os). When a reversal threshold is crossed by price, a new column, which moves in the opposite direction, will be created next to a previous column.
Thereby, if securities move, for example, in ascending trend, a chart will show the growing column of Xs until these securities move downwards for a distance more that a reversal threshold (as a rule, several boxes represent a reversal threshold, for example, 3 boxes). The same situation occurs in case of appearance of a column of Os.
It is necessary to remember two important specific points:
1. There is no linear time scale on Point-and-figure charts, so each column can represent several minutes or several days depending on price movement patterns.
2. There is no definite price value in a box on Point-and-figure charts. On the contrary, a certain range of price values is displayed, which is situated within the limits of the box size.
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