The following two charts both show the prices of Atlantic Richfield.
The first chart displays prices in P&F, the second chart displays prices as high, low,
close bars.
As I mentioned above, P&F charts focus only on price action.
Looking at this P&F chart, you can see that prices were initially contained between a
support level at 114 and a resistance level at 121. When prices broke above the resistance
level at 121 (the long column of Xs), that level became the new support level. This new
support level eventually failed (the long column of Os), prices re-tested the support at
114, made a small rally, and then fell below the 114 support level.
Point & Figure charts display an "X" when prices rise by the "box size" (a value you specify) and display an "O" when prices fall by the box size. Note that no Xs or Os are drawn if prices rise or fall by an amount that is less than the box size.
Each column can contain either Xs or Os, but never both. In order to
change columns (e.g., from an X column to an O column), prices must reverse by the
"reversal amount" (another value you specify) multiplied by the box size. For
example, if the box size is three points and the reversal amount is two boxes, then prices
must reverse direction six points (three multiplied by two) in order to change columns. If
you are in a column of Xs, the price must fall six points to change to a column of Os. If
you are in a column of Os, the price must rise six points to change to a column of Xs.
The changing of columns identifies a change in the trend of prices.
When a new column of Xs appears, it shows that prices are rallying higher. When a new
column of Os appears, it shows that prices are moving lower.
Because prices must reverse direction by the reversal amount, the
minimum number of Xs or Os that can appear in a column is equal to the "reversal
amount."
The common practice is to use the high and low prices (not just the
close) to decide if prices have changed enough to display a new box.