21July/August 2003

FEATUREFEATUREFEATUREFEATUREFEATURECICICICICI Understanding and Using Point and Figure ChartsUnderstanding and Using Point and Figure ChartsUnderstanding and Using Point and Figure ChartsUnderstanding and Using Point and Figure ChartsUnderstanding and Using Point and Figure Charts

By Wayne A. Thorp, CFA

Without a doubt, software and Websites have made the lives of numerousinvestors easier by speeding the analy-sis process. One area that has seen no-table improvement is chart creation.Instead of having to spend time eachday manually updating charts—which limits the number of securitiesone can realistically track—investorscan now create an endless array ofcharts in a matter of seconds withtoday’s technical analysis and chart-ing services. Reviews of the top soft-ware- and Web-based technical analy-sis and charting services can be foundin the Computerized Investing archivesat the AAII Web site (www.aaii.com/cimember/).

The advent of computerized chart-ing resources has also led to the emer-gence of some relatively obscure charttypes, such as candlestick, equivolume,and point and figure. This articleserves as an introduction to point andfigure charting and also covers re-sources for creating and learning moreabout these charts.

Supply and DemandSupply and DemandSupply and DemandSupply and DemandSupply and DemandOne of the basic principles

of economics is the law ofsupply and demand. Itstates that in a free marketwhen there are more buyersthan sellers—demand out-strips supply—prices willrise, all else being equal.Point and figure charts at-tempt to capture the battlebetween supply and de-mand.

Point and figure chartshave been in existence formore than 100 years, but ittook the advent of computersoftware and Web sites tobring them into the main-stream. Their usefulness liesin their ability to filter outmarket “noise”—short-termprice fluctuations that occur

during longer, more established trends.They differ from more conventionalcharts such as open-high-low-closecharts in that they ignore the passageof time—they are only affected by “sig-nificant” price movements. Figure 1 isan example of a point and figure chartfor Moody’s Corporation (MCO) thatcovers the period of January 4, 2002,through June 6, 2003. At first glance,you may notice that this chart is quitedifferent from the oft-used line or barcharts. First, the chart is made up ofcolumns of X’s and O’s—X’s representrising prices and O’s represent fallingprices. Put another way, X’s representdemand and O’s supply. The move-ment from columns of X’s to O’s andback again creates patterns that maybe used to make buy and sell decisions.Also, note that there are numbers andletters dispersed among the X’s andO’s. Since point and figure charts arenot impacted by the passage of time,per se, numbers and letters are used torepresent months. The first box enteredin a month is represented by the num-

bers one through nine for Januarythrough September and A, B, and C forthe “double-digit” months of October,November, and December. So a “1”would be used to indicate the first pointof January and “B” would representNovember.

There are two key items you need toaddress before you can begin creatingyour own point and figure charts—thebox size and reversal amount.

Box SizeBox SizeBox SizeBox SizeBox SizeThe box size is based on the scale

you wish to use for a particular secu-rity or index and represents the valuegiven to each box—X or O—on thechart. It is the minimum price changeneeded to continue the current trend—i.e., to add another X to the top of acolumn of X’s or to add another O tothe bottom of a column of O’s. This isan important decision because a moveof $3 for a $10 stock is more dramaticthan a $3 move on a $100 stock. Eachbox corresponds to a $1 stock pricemove in our example in Figure 1. Fur-

$54

$53 X

$52 X X

$51 X 8 O X

$50 X X X O X X O X X 5

$49 X O X O X O X O X O X O X O X 4

$48 X O X O X O X O X O X O X O X O X

$47 X 6 O 7 O X 9 O X O X O X

$46 X O X O X O X O

$45 X O X O X O 3

$44 5 O X O X B 1 X

$43 X O X O X O X O 2

$42 X 4 O X A O X O X

$41 X O X O O X O X

$40 X O 2 X C O

$39 1 O X O 3

$38 O X O X

$37 O O X

$36 O

02 03

Figure 1.Figure 1.Figure 1.Figure 1.Figure 1.Point & Figure Chart for Moody’s Corporation (1/4/2002 to 6/6/2003)Point & Figure Chart for Moody’s Corporation (1/4/2002 to 6/6/2003)Point & Figure Chart for Moody’s Corporation (1/4/2002 to 6/6/2003)Point & Figure Chart for Moody’s Corporation (1/4/2002 to 6/6/2003)Point & Figure Chart for Moody’s Corporation (1/4/2002 to 6/6/2003)

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thermore, since point and figure chartsare used to filter out “noise” in themarket, you will want to be sure thatyou are filtering out just enough mo-mentary price reversals, yet at the sametime allowing some to pass through sothat you can identify when a signifi-cant reversal is taking place.

As you use point and figure charts,you may find that different box sizeswork better for your trading style or fora particular security. Traditionally,however, box sizes have been brokendown into the following levels:

Share PriceShare PriceShare PriceShare PriceShare Price Box SizeBox SizeBox SizeBox SizeBox SizeBelow $5 ............................. $0.25Between $5 and $20............ $0.50Between $20 and $100 ....... $1.00Over $100 .......................... $2.00

Reversal MethodReversal MethodReversal MethodReversal MethodReversal MethodThe other key to the analysis of point

and figure charts is how you move fromone column to another, called the “re-versal method.” The reversal amount

determines how many boxes the pricemust reverse course by in order to moveto a new column and switch from X’sto O’s, or vice versa. While this can beleft to the individual creating the chart,the typical reversal is the “three-box”or “three-point” reversal. This meth-odology is thought to eliminate spuri-ous price fluctuations and focus onlyon “significant” price movements.

Based on the traditional parametersshown here, if a stock is trading below$5 with a box size of $0.25, it wouldtake a price move—up or down—of$0.75 to generate a three-box (three-point) reversal. The box size for stockstrading below $5 is $0.25, so a three-box reversal would take at least three$0.25 price moves to necessitate a shiftto a new column of X’s or O’s. Thesame principle applies no matter thebox size.

Depending on the software packageor Web site you are using to create pointand figure charts, you may have the

ability to specify the box size as wellas the reversal amount.

Having established the parametersfor the essential elements of a pointand figure chart, you must then lookat which price(s) you will use to plotyour chart. Purists generally use thehigh and low prices for the period(day, week, month, etc.), while othersmay focus strictly on a single pricesuch as the close. This decision maybe driven by the data source you areusing—whether or not it offers highand low prices or merely the closingprice. Depending on the price(s) youuse, you may get different results. Forthis reason, it is also important tofind out the method used by a soft-ware package or Web site to createpoint and figure charts.

When creating point and figurecharts, you remain in the same col-umn of X’s or O’s as long as pricescontinue to rise or fall, respectively.For example, if a chart is in a columnof X’s and prices are rising, youwould need to identify whether theprice raised one full box or more. Ifyou are basing your decisions onhigh and low prices and not the clos-ing price, this is done by looking at

the high price for the day. If the pricedid rise by at least one box, you wouldadd an X to the top of the column. Atthat point, you are done for the day. Aslong as prices continue to rise (or donot fall); the low price is disregarded. Ifthe high price rose by one box but thelow price was several box sizes belowit, you still only plot the one box in-crease. As long as prices continue intheir current path, you are only inter-ested in one direction per period.

If, however, the next day the pricedoes not rise by at least one box (stay-ing with our example of being in a col-umn of X’s), you must look to seewhether the price reversed by three ormore boxes. If it did not, nothing isadded to the chart for that day. This isan example of point and figure chartsfiltering out “insignificant” pricemovements; it also differs from barcharts, where we would still plot a bareven if prices do not move. If and whenthe price reverses downward by three

Action Action

Point Point

Date Open High Low Close #1 #2

1/2/2003 41.50 43.70 41.48 43.70 44 40

1/3/2003 43.95 43.12 44 40

1/6/2003 44.11 42.85 44 40

1/7/2003 42.86 41.88 45 41

1/8/2003 42.61 41.52 45 41

1/9/2003 41.90 40.61 45 41

1/10/2003 40.48 39.50 40 44

1/13/2003 42.70 41.35 39 43

1/14/2003 42.23 41.25 39 43 $44 X

1/15/2003 41.93 41.25 39 43 $43 1 O 2

1/16/2003 42.85 41.77 39 43 $42 O X

1/17/2003 42.55 42.01 39 43 $41 O X

1/21/2003 42.65 42.07 39 43 $40 O

1/22/2003 42.20 41.58 39 43

1/23/2003 42.50 41.85 39 43

1/24/2003 42.25 40.88 39 43

1/27/2003 41.63 39.88 39 43

1/28/2003 41.37 40.36 39 43

1/29/2003 41.65 40.65 39 43

1/30/2003 41.36 40.93 39 43

1/31/2003 41.99 40.92 39 43

2/3/2003 43.11 41.88 39 43

2/4/2003 42.71 41.54 44 40

Price ($)

Figure 2.Figure 2.Figure 2.Figure 2.Figure 2.Plotting Moody’s Action PointsPlotting Moody’s Action PointsPlotting Moody’s Action PointsPlotting Moody’s Action PointsPlotting Moody’s Action Points

23July/August 2003

or more boxes, you would shift onecolumn to the right and begin plottinga new column of O’s.

Point and Figure: Step-By-StepPoint and Figure: Step-By-StepPoint and Figure: Step-By-StepPoint and Figure: Step-By-StepPoint and Figure: Step-By-StepAlthough computerized tools can

create point and figure charts for you,it is always necessary to understandthe underlying process. For this rea-son, we will show you how to manu-ally construct a point and figure chart.

Figure 2 shows the high and lowprices for Moody’s Corporation for theperiod of January 2, 2003, to February4, 2003, as well as the point and figurechart constructed using this data. Datesthat are bolded and italicized identifywhere a shift takes place from a col-umn of X’s to a column of O’s, or viceversa.

When manually creating a point andfigure chart, it is helpful to determinethe “action points” for each period(also shown in Figure 2). For a chart ina column of O’s, the first action point isthe price that is one box lower than thelast. If the low price falls to this pointor below, we add to the column of O’sdown to the low price for that period.The second action point would be theprice at which a three-box (three-point)reversal occurs. This point is threeboxes above the lowest O. If the highprice for the day reaches this point,assuming another O was not added tothe column, we would then switch to anew column of X’s.

When you are in a column of X’s, thefirst action point is the price that is onebox above the last X. The other actionpoint—where the three-point reversaltakes place—is the price that is threeboxes below the highest X. If this levelis reached, we switch to a new columnof O’s.

Now, let’s walk through the plottingof data from select days in Figure 2.

January 2: When you begin plottinga point and figure chart, you first mustdecide whether you are in a column ofX’s or a column of O’s. There are acouple of different methods to use—use the prior day’s close as your refer-ence point or use the first day’s open-ing price. Once you select the referencepoint, the closing price on the first day

you are plotting will dictate whetheryou begin plotting X’s or O’s. Note thatthis is the only time opening and clos-ing prices are considered.

For this example, we use the openingprice on January 2, 2003—$41.50—asas the reference point. Comparing theclosing price on that day—$43.70—tothe reference point, we see that theprice increased, meaning we begin ourpoint and figure chart by plotting X’s.

When plotting a point and figurechart, it is easier to deal in whole num-bers, so the high and low prices foreach day are rounded upward or down-ward—low prices are rounded up tothe next whole number and high pricesare rounded down. Therefore, $43.70,the high price, is rounded down to 43,and this is the point where we plot thefirst X of our point and figure chart.However, since this is the first plot inJanuary we use a 1 instead of an X. Weare now done for the day.

January 3: Since we are in a columnof X’s, the first action point is wherewe would add another X to the currentcolumn, in this case 44—one box above43. The other action point is 40, whichis three boxes below the current X at43. The high for the day is $43.95,rounded down to 43. Since this is be-low the first action point, we do notplot another X. Instead, we look at thelow price for the day to see if a three-box reversal has taken place. The lowprice—$43.12, rounded up to 44—ishigher than the second action point at40, so we do nothing for the day.

January 6: The first action point isthat level that is one box above the high-est X in the current column—44 (43 +1). The high price for the day, roundeddown, is 44. Since this equals the firstaction point, we stay in the same col-umn and add an X at the 44 level.

January 9: After adding a new X tothe current column on January 6, noaction was taken on January 7 or 8.The first action point is now 45 (44 +1). The high price for the day, roundeddown, is 41—no additional X’s areadded to the column. The second ac-tion point is 41 (44 – 3). The low pricefor the day is $40.61, which we roundup to 41. Since the low for the day

equals the second action point, a three-box reversal has taken place. There-fore, we shift one column to the rightand start a column of O’s that begins at43, one box below the highest X of theprevious column, and goes down to41.

January 10: Now that we are in acolumn of O’s, we want to know if theprice fell. The first action point is thelevel where we would add another Oto the current column; in this case, thebox below the lowest O at 41 is 40. Thesecond action point is where a three-box reversal would take place and isthree boxes above the lowest O: 44 (41+ 3). The low price of the day, $39.50rounded up to 40, equals our first ac-tion point. Therefore, we stay in thecolumn of O’s and add another O tothe bottom of the current column at 40.

February 3: Since point and figurecharts are only concerned with “sig-nificant” price movements, do not besurprised if days or even weeks go bywith no activity on the chart, as wasthe case between January 10 and Janu-ary 31. We are still in a column of O’swith the lowest at 40. Looking at theaction points for the day, the first is 39(one box lower than the lowest O at 40)and the second is 43 (three boxes abovethe lowest at 40). The low price for theday, $41.88 rounded up to 42, is abovethe first action point, so we move on tothe high price for the day: $43.11,rounded down to 43. This equals thesecond action point, so we shift to anew column of X’s that begins at 41and goes up to 43, with a 2 at 43 torepresent February.

Computerizing Point & FigureComputerizing Point & FigureComputerizing Point & FigureComputerizing Point & FigureComputerizing Point & FigureAlthough we have shown how you

would manually create point and fig-ure charts, realistically you would usea software package or Web site to cre-ate them for you, allowing yourselfmore time to perform actual analysis.There are several tools available to aidyou in this pursuit.

StockCharts.comStockCharts.comStockCharts.comStockCharts.comStockCharts.comWhile a relative newcomer

to the arena of Web-basedcharting, the StockCharts Web site

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(www.stockcharts.com) has trans-formed itself into a leader in the field.Not only does it offer a wide array ofcharting options—including point andfigure—it also offers chart scanning ca-pabilities and an extensive educationalarea dealing with charting and techni-cal analysis. The site offers both freeaccess as well as expanded featureswith a variety of subscription optionsranging in price from $9.95 to $30.95 amonth.

Two types of point and figure chartsare offered: text-based “classic” chartsand Java-based “dynamic” charts.While the classic charts can be viewedwith any Web browser, you must havea Java-enabled Web browser to viewdynamic charts.

Free access at the Web site allowsyou to plot up to three years of data ona chart; subscribers can plot data go-ing back to 1990. Subscribers also havethe benefit of being able to save thecharts they create for future viewing.

One drawback with the classic chart isthat you are limited to predefined timeperiods over which the data can beplotted. While slightly cumbersome,the dynamic charts provide a slidingbar where you can specify the exacttime period you want charted. Withboth types of point and figure charts,you can specify the reversal amountfor a chart as well as the box size. Bydefault, the dynamic charts use thehigh/low range in creating the charts,which is the method we used to createthe Moody’s chart. With the classicpoint and figure charts, you have theoption of using the high/low range orthe closing price.

Once you have created your pointand figure chart, you have a number ofadditional analysis tools and featuresat your disposal. With the classiccharts, users can apply price overlayssuch as trading bands, automatictrendlines, and moving averages.While these features are not availablewith the dynamic charts, users can plottheir own trendlines within the Javaapplet. The site also automatically gen-erates point and figure alerts for anychart you create. These alerts are avail-able on the classic charts and are meant

Figure 4.Figure 4.Figure 4.Figure 4.Figure 4.StockCharts.com Predefined Point and Figure ScansStockCharts.com Predefined Point and Figure ScansStockCharts.com Predefined Point and Figure ScansStockCharts.com Predefined Point and Figure ScansStockCharts.com Predefined Point and Figure Scans

Figure 3.Figure 3.Figure 3.Figure 3.Figure 3.StockCharts.com Point and Figure AlertStockCharts.com Point and Figure AlertStockCharts.com Point and Figure AlertStockCharts.com Point and Figure AlertStockCharts.com Point and Figure Alert

25July/August 2003

Figure 5.Figure 5.Figure 5.Figure 5.Figure 5.StockCharts.com Multiple-Expression ScansStockCharts.com Multiple-Expression ScansStockCharts.com Multiple-Expression ScansStockCharts.com Multiple-Expression ScansStockCharts.com Multiple-Expression Scans

Figure 6.Figure 6.Figure 6.Figure 6.Figure 6.MarketScreen.com Point and Figure ChartMarketScreen.com Point and Figure ChartMarketScreen.com Point and Figure ChartMarketScreen.com Point and Figure ChartMarketScreen.com Point and Figure Chart

to alert you to changes in the supply/demand relationship of the stock point.Figure 3 is an example of a point andfigure alert for Moody’s—in this case,a bullish ascending triple-top breakoutalert.

Another unique feature is the rela-tive strength chart, which is also avail-able only with the classic charts. Thispoint and figure chart compares oneticker to another. The price of the firstsymbol is divided by the price of thesecond and then scaled to create thechart.

Beyond charting, the StockChartsWeb site offers stock scans, which areformulae applied to the site’s universeof stocks, mutual funds, and indexesthat return a list of tickers that matchthe filter criteria of the scan. These scansare broken down into groups—techni-cal indicator scans, candlestick patternscans, and point and figure patternscans. There are currently 17 pre-defined point and figure pattern scans;see Figure 4 for a listing of these scans.As this figure also shows, the site of-fers a link to the list of tickers matchingeach scan—as of the end of the last

trading day—broken down by ex-change. From this list, you can accesscharts for each of the passing tickers.

Subscribers to the site can also createtheir own scans and save them (Extra!subscribers only). Basic subscribers cancreate single-expression scans, whileExtra! subscribers can create multiple-expression scans (Figure 5). Once youhave created a scan, you can view any-where from 10 to 999 of the passingtickers, depending on your subscrip-tion level.

Finally, for those who are new topoint and figure charting or technicalanalysis, StockCharts.com offers someof the best educational content avail-able for free on the Internet in thisarea. The site’s Chart School offers anoverview of technical analysis as wellas discussions of popular chart types(including point and figure charts)and technical indicators. Tutorials arealso available on how to use the vari-ous elements of the StockCharts Website.

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Figure 8.Figure 8.Figure 8.Figure 8.Figure 8.DWA Trading Summary for SubscribersDWA Trading Summary for SubscribersDWA Trading Summary for SubscribersDWA Trading Summary for SubscribersDWA Trading Summary for Subscribers

MarketScreen.comMarketScreen.comMarketScreen.comMarketScreen.comMarketScreen.comThe MarketScreen Web site

(www.marketscreen.com), as its nameimplies, is focused on providing stockscreening and market alerts. In a simi-lar fashion to StockCharts.com, theMarketScreen site offers point and fig-ure charting and market scans both forfree and on a subscription basis.

From a charting standpoint, theMarketScreen Web site allows users tospecify both the box size and reversalamount. Unfortunately, users do nothave the ability to specify a customtime frame for a chart—several choicesfor predefined durations go back as faras five years. Users can specify whetherthey want to use daily, weekly, ormonthly data. Those with subscrip-tions to the site, which cost $49.95 amonth or $439.95 a year, can savecharts for future viewing.

This site also uses high/low pricesto create its point and figure charts.However, comparing the Moody’spoint and figure chart fromMarketScreen in Figure 6 to that ofStockCharts.com in Figure 3 and thepoint and figure chart created manu-ally in Figure 1, you can see that they

all differ slightly, irrespective of the dif-fering time frames. While they all usehigh/low prices, there is obviouslyroom for interpretation when creating

such charts. Keep this in mind whenviewing different point and figurecharts for the same security.

The MarketScreen site also offers lit-erally hundreds of market scans orscreens covering such areas as priceand volume activity, moving averages,chart patterns, support and resistancelevels, technical indicators, and fun-damental factors. The site provides freeaccess to scan results based upon end-of-day data from three, four, five, andsix trading days prior. A subscriptionis required to access intraday resultsas well as end-of-day results for eachof the last three trading days. There areover 30 point and figure pattern scansavailable, with the results of each bro-ken down by exchange—Nasdaq, NewYork, and American—as well as bymarket cap—micro, small, mid, andlarge.

The lists of passing companies pro-vide links to charts, quotes, news items,and SEC filings for each company. Sub-scribers can also create and save theirown scans (Figure 7) and view the re-sults on both an intraday and end-of-day basis.

Figure 7.Figure 7.Figure 7.Figure 7.Figure 7.Saving Scans in MarketScreen.comSaving Scans in MarketScreen.comSaving Scans in MarketScreen.comSaving Scans in MarketScreen.comSaving Scans in MarketScreen.com

27July/August 2003

Dorsey Wright & AssociatesDorsey Wright & AssociatesDorsey Wright & AssociatesDorsey Wright & AssociatesDorsey Wright & AssociatesFor many years, the Dorsey Wright &

Associates (DWA) Web site(www.dorseywright.com) was the onlysite offering point and figure charts,and it continues to be the sole site de-voted exclusively to the discipline ofpoint and figure. The company’sfounder, Thomas Dorsey, is often cred-ited with bringing point and figurecharting back from the brink of obscu-rity and is the author of “Point andFigure Charting: The Essential Appli-cation for Forecasting and TrackingMarket Prices” (second edition, JohnWiley & Sons, 2001), a must-read forthose interested in point and figurecharting.

The site is primarily fee-based, withindividual subscriptions ranging from$25 to $45 a month. A free three-weektrial is also available.

Upon entering the site, subscribersare presented with a summary of thelast completed trading day—includingthe point and figure chart activity ofkey market indexes and sectors, as wellas a calendar of recent and pendingeconomic releases (Figure 8). If youhave created any portfolios, you canaccess them from this page as well.

The DWA site offers some basicscreening capabilities. The on-linequery allows users to choose from anumber of criteria—including relativestrength, percent oversold/overbought,market cap—and view those stocksand mutual funds that match their cri-teria. These queries can then be savedfor future use. With the site’s patternreports, you can view those securitiesforming both bullish and bearish pointand figure patterns.

For point and figure charting, the siteuses the high/low price and allowsusers to specify the box size and rever-sal amount (Figure 9). Users can alsospecify the number of years they want

Figure 9.Figure 9.Figure 9.Figure 9.Figure 9.DWA Point and Figure ChartDWA Point and Figure ChartDWA Point and Figure ChartDWA Point and Figure ChartDWA Point and Figure Chart

charted, with data going back to 1986when available.

Beyond the point and figure chart,the site provides information regard-ing weekly momentum, sector status,and the latest chart pattern. Once youhave created a chart, you can export aPDF document to print or save to yourcomputer. Users can also create andsave notations for the charts they cre-ate as well as set action price alerts. Ifthe action price you specify is betweenthe high and low price for the day, youwill receive a notification via E-mail.

Each stock tracked by the DWA da-tabase has a daily commentary reportas well as an evaluation that rates thetechnical attributes of the stock.

The site’s Point & Figure Universityis free to all registered users and cur-rently offers six lessons ranging fromthe basics of point and figure charting

to its use in market and sector timing.At the end of each lesson there is a testthat allows you to determine your ar-eas of weakness. The site details plansto launch live on-line classes in thefuture, although no timetable is given.

ConclusionConclusionConclusionConclusionConclusionPoint and figure charts give inves-

tors a unique perspective when view-ing price activity. By eliminating timefrom the equation and focusing onlyon “significant” price movements, theyallow investors to focus on the interac-tion between the supply and demandof a given security—the driving forcebehind security prices.

Wayne A. Thorp, CFA, is associate edi-tor of Computerized Investing andAAII’s financial analyst.