What Is a Box Size?
A box size is the minimum price change that must occur before the next mark is added to a point-and-figure (P&F) chart.
Box sizes are an essential component of P&F charts because they determine the value of price movements that will be represented by each mark on the chart. For example, a box size of $1.00 would mean that each mark on the P&F chart represents a $1.00 change in the price of the security.
- Box sizes are a critical component of P&F charts.
- Modifying the box size of a P&F chart will influence how much the price of the security being observed needs to change before a new data point will be added to the chart.
- They are used by technical analysts to determine the amount of resolution they wish to see.
Understanding Box Sizes
Technical analysts use various charts to inform their investment decisions. These charts capture past and present price information to assist in determining when to buy or sell a particular security, such as a stock or a futures contract.
Traditional chart types include bar charts and line charts, which plot price changes at specific time intervals, such as once per trading day. P&F charts, on the other hand, add a new data point only once the price of the security has moved by a specific amount. The amount by which the price must change before a new data point is added is called the box size.
To understand further, consider the following example of a P&F chart:
The circular shapes shown represent a decline in the price of the security, whereas the X shapes represent an increase in price. The space on the chart in which each of these shapes occur is called the "box." In this example, the box price is $5.00. Therefore, a column with three X shapes represents an increase of $15.00, a column with 12 circles represents a decline of $60.00, and so on.
Real World Example of a Box Size
When prices are rising, the Xs of a P&F chart are stacked on top of one another every time the price increases by the box size, producing a column. Similarly, once the price drops by an amount equal to the box size, a new column of circles will be created to the right of the previous X column. As long as prices continue to drop, additional circles will be stacked under the first circle to denote each additional box-sized decline in price (in this case, in increments of $5 each).
P&F charts with larger box sizes provide a less detailed view of the security in question, while charts with smaller box sizes provide a more detailed view.
For example, suppose that in the chart above the box size was $50 instead of $5. In that scenario, many of the columns of Xs and Os shown on the chart would not be visible at all. The resulting shape of the chart would be more smooth, showing only the high level price movement with less of its nuanced peaks and valleys.
The opposite is also true. If the box size was $1 instead of $5, we would see a much higher resolution of price variations.
Each trader will have their own preferences regarding the level of detail they wish to see in their charts. By tweaking the box size, traders can adjust P&F charts to reveal only the level of detail they find most useful in their analysis.