Constructing Point and Figure Charts

Hey everyone, welcome back. In this lesson—continuing our series here at Interactive Brokers—we’re focusing on how Point & Figure charts are actually formed and what it means when you see X’s and O’s on your Trader Workstation. Now, remember from our previous discussion: these charts are all about price movement, not time. That means instead of drawing a candle every day (or every hour, or what have you), you’re going to plot a new X or O only when the price moves by a specific amount.

Here’s the super-quick rundown:

• X’s indicate prices moved up.
• O’s indicate prices moved down.

You also have the concept of box size (for example, $1 or $2 or $5) which tells you exactly how big that price movement needs to be before you draw a new X or O. Then there’s the reversal amount, which tells you how many boxes it takes to switch from X’s to O’s or vice versa. So, if you have a box size of $1 and a reversal of 3, the price has to move $3 against your last column before you start plotting the other symbol.

The main advantage is it cuts out all the small back-and-forth noise that can freak out investors in regular Candlestick or bar charts. For instance, if you’re in an up column (printing X’s), you can ignore those little intraday swings until there’s an actual $3 drop—then and only then do you flip to O’s. It really simplifies your perspective, so you don’t get bogged down by tiny fluctuations that might not matter to your long-term strategy.

And the best part? You can tailor the box size and reversal amount to fit your style. Maybe you only care about big $5 or $15 moves on a stock like Apple—just adjust those settings in TWS, and you’re good to go. If the chart’s still printing X’s, no real pullback has happened in your eyes, so you can just sit back and stick to your plan.

Overall, Point & Figure charts are a fantastic tool to help you stay disciplined, remove the clutter of short-term price action, and focus on whether the market’s genuinely moving up or down in a significant way. That’s it for this lesson, and we’ll see you next time as we dive deeper into how to use these charts for technical analysis here at Interactive Brokers.

Contributor

Michael Nauss, CMT

Substack:  https://michaelnausscmt.substack.com/

Site:  www.statsedgetrading.com