Point and Figure Chart

Building a P&F chart requires two parameters: box size and reversal amount. The box size defines the minimum price move required to add a new X or O to an existing column. The reversal amount (typically 3 boxes, hence a "3-box reversal" chart) defines how far price must reverse before starting a new column in the opposite direction.

For a chart with a $1 box size and 3-box reversal: if price is in a rising X column, it must fall $3 (three full boxes) to start a new O column. Within a column, a new X is added for every $1 rise; a new O for every $1 decline. When a reversal occurs, the new column starts one box to the right of the previous column.

Box size selection affects sensitivity. A smaller box (e.g., 0.5% ATR-based) produces more frequent signals suitable for shorter timeframes. A larger box (e.g., 2% ATR-based) filters more noise and suits position traders. ATR-based dynamic box sizing adapts to each ticker's volatility rather than using a fixed dollar amount — the method Tradewink uses for its P&F analysis.

P&F charts generate standardized buy and sell signals based on column patterns. The simplest are the Double Top Buy (an X column exceeds the previous X column's high by one box) and Double Bottom Sell (an O column breaks below the previous O column's low by one box). These basic signals have well-documented historical reliability.

More powerful signals include: the Triple Top Buy (three prior X highs exceeded — stronger than double top), the Spread Triple Top (X column exceeds a resistance level held across three or more prior columns), and the Bullish Catapult (a spread triple top that then consolidates and breaks out again). Bearish equivalents exist for each pattern on the sell side.

Breakout from a congestion zone — a period of alternating X and O columns within a narrow range — often produces the strongest sustained moves. The width of the congestion zone (counted in columns) informs the horizontal count price target. Tradewink's support and resistance engine uses P&F-derived congestion zones to set trade targets.

P&F charts offer two systematic methods for calculating price targets — a feature absent from most other charting methods.

Horizontal count (base count): Count the number of columns in a congestion zone (the base from which a breakout occurs), multiply by the box size and reversal amount, and add the result to the breakout point. Example: a 10-column base, $1 box, 3-box reversal = 10 x $1 x 3 = $30 price objective added to the breakout level. The horizontal count is considered the more reliable of the two methods.

Vertical count: Count the number of boxes in the initial breakout column and multiply by 3 (for a 3-box reversal chart), then add to the low of that column. Example: a breakout column of 8 boxes = 8 x 3 = 24 boxes x $1 = $24 target. Vertical counts are more mechanical and less reliable than horizontal counts.

These price targets are not guarantees but statistical tendencies. When the horizontal and vertical counts converge on a similar target level, confidence in the objective increases. P&F targets are most useful as reference points for risk/reward analysis rather than as precise price predictions.

Point and figure charts and candlestick charts serve complementary purposes. Candlestick charts excel at: intraday analysis (P&F ignores time, making intraday timing difficult), pattern recognition where the shape of individual candles matters (doji, hammer, engulfing patterns), and monitoring how price behaves around time-sensitive events (earnings, catalyst days).

P&F charts excel at: identifying long-term support and resistance levels with complete objectivity, generating unambiguous buy/sell signals without subjective interpretation, calculating systematic price targets, and filtering short-term noise to reveal the underlying trend structure. A weekly P&F chart of a stock can reveal multi-year support zones invisible on a standard candlestick chart.

Sophisticated technical analysts use both: P&F for the strategic picture (where is the long-term resistance? What is the price target?) and candlestick or bar charts for the tactical picture (how should I time the entry? What does intraday price action look like?). Tradewink references P&F analysis for target calculation and key level identification while using candlestick-based pattern recognition for precise entry timing.