Point and Figure Relative Strength Box Sizes

In June, we released Point and Figure Relative Strength Signals, by John Lewis, CMT.  This white paper provided important insights into using PnF relative strength signals.  The study included research covering the period 1990-2013.

Securities on a buy signal and in a column of X’s have the best intermediate and long term relative strength characteristics so that is the basket of securities we would expect to perform the best over time. That is certainly the case over time. Maintaining a portfolio of stocks on relative strength point and figure buy signals and in columns of X’s dramatically outperformed the other three point and figure relative strength states.

John has now written a follow-up white paper that analyzes a different aspect of PnF relative strength signals: Box Sizes.  Click here to access Point and Figure Relative Strength Box Sizes.  This paper addresses the frequently asked question, “What box size should I use?” and will help answer the question of why 6.50% box size is the default box size on the Dorsey Wright research database.  This white paper also studies the period of 1990-2013.  A summary table of the results is shown below:

box sizes

The data in Table 1 helps us determine what the equivalent of an intermediate term horizon is in terms of point and figure box sizes. Much like the time-based methods, the returns suffer when the box size is too small or too large. In the case of the former, the system picks up too much of the short term trading noise. In the case of the latter, too much has to happen in order for the point and figure chart to register a change. The sweet spot is in the 6.5% to 7.5% box size range. Using a 6.5% box size means that a security has to underperform the broad market by 19.5% in order to change columns and be shifted out of the group that qualifies as having the best relative strength. The large percentage reversal required may surprise many people, but relative price moves in the 20% to 25% range exhibit the best long term performance. The magnitude of these moves indicates how important it is to stick with a strong stock during the dynamic part of its price appreciation cycle. We have noticed over the years that stocks with strong momentum characteristics are often volatile and are prone to sharp pullbacks before continuing to new highs. Trying to “get out in front” of the trend change by using a smaller box size will certainly be a better method when the trend change happens, but the data indicates this is hard to predict .

Stay tuned for part three of this series of white papers which will likely be released next month.

A relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Past performance is no guarantee of future returns.

3 Responses to Point and Figure Relative Strength Box Sizes

  1. Steve says:

    Just to clarify:
    “Using a 6.5% box size means that a security has to underperform the broad market by 19.5% in order to change columns and be shifted out of the group that qualifies as having the best relative strength.”

    So an example would be…..
    If the market has moved up 5%, the stock needs to have moved up (in the same time period), more than 4% to remain in a column of ‘x’, right?

    You’re not actually talking about literal 20% moves the stock itself, I mean. The 19.5% is relative to the (equal weight) universe you’re comparing it to?

  2. Andy Hyer says:

    Hi Steve,

    In order to reverse to a column of O’s from a column of X’s on a PnF relative strength chart using a 6.5% box size, using the 3-box reversal method, a stock must underperfom the benchmark by 19.5%. Feel free to give me a call if you’d like to discuss. 626-535-0630