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Plotting a chart, step by step
The high-low and closing-price methods, with a worked example.
Plotting a P&F chart follows a short set of rules. Charting software does it for you, but understanding the rules shows you exactly why each X and O appears.
Two methods: high-low and close
- High-low method. Uses each period's high and low. It's the traditional method for daily charts and catches intraday extremes.
- Closing-price method. Uses only the closing price of each period. It's simpler and slightly less sensitive.
On a live chart fed by individual trades, every new price is treated like its own tiny period, so the two methods give the same result.
The high-low rules
If the current column is X's (rising)
- Check the high first. If it reached one or more new boxes above the top X, add those X's. You're done for this period; ignore the low.
- If the high added nothing, check the low. If it fell at least three boxes below the top X, start a new O column one box below the top X and fill down to the low.
- If neither happened, do nothing.
If the current column is O's (falling)
- Check the low first. If it reached one or more new boxes below the bottom O, add those O's and ignore the high.
- If not, check the high. If it rose at least three boxes above the bottom O, start a new X column one box above the bottom O and fill up to the high.
- If neither happened, do nothing.
Always check continuation in the current direction first, then reversal. Only one of the two can happen in a single period.
A box is filled only when price actually reaches it. With $1 boxes, a high of $51.40 fills the $51 box but not $52. A low of $46.30 fills the $47 box but not $46.
A worked example
Box size $1, 3-box reversal. The current column is X's, topping at $50.
| Day | High | Low | What happens |
|---|---|---|---|
| 1 | $51.40 | $49.20 | High reaches $51: add one X. Ignore the low. |
| 2 | $51.80 | $48.60 | No new X (would need $52). Reversal needs $48 or lower; $48.60 isn't enough. Nothing plotted. |
| 3 | $50.90 | $47.70 | No new X. Low reaches $48, three boxes below $51: new O column with O's at $50, $49 and $48. |
| 4 | $49.50 | $46.30 | Low reaches $47: add one O. Ignore the high. |
| 5 | $50.20 | $47.10 | No new O (would need $46). High reaches $50, three boxes above $47: new X column with X's at $48, $49 and $50. |
Notice day 2: price swung $3.20 from high to low, yet the chart didn't change. That's the noise filter at work.
For education only. Nothing here is investment advice or a recommendation to buy or sell any security.