In my previous newsletter, we discussed about the brick sizes for Point and Figure (PnF) charts. We understood the meaning of Timeframe and the various box sizes or brick sizes to use for noiseless charts for various trading horizons. One of the doubts regarding the box sizes is why we use “%” box sizes?

For noiseless charts, box sizes are of two types: Log and Linear. Today we will explore both the box size types and understand which is better.

The two box size types: Log and Linear

Linear Box sizes: Linear box sizes are absolute box sizes. They are set as a particular number and not as percentage. These box sizes plot price in equal steps. For example, if the box size is set to ₹20, then the box will be plotted on chart at each multiple of 20.

Let’s say the price went from ₹200 to ₹ 500 with no reversal and the box size is ₹20. This would mean the number of bricks plotted will be 15.

Log Box sizes: Log box sizes are in percentage terms. A box will be plotted on chart only if the price moves by the % box size, set by the trader, from the most recent box.

For examples, if the box size is set to 1%, then a box will be plotted only if the price moves by 1% from the high (in case of a continuing bullish brick) or low (in case of a continuing bearish brick) of most recent box value. Let’s say high of the most recent box is ₹105 and the box size is 1%. The next brick will be plotted only if the price closes above ₹106.05. If the price is below this level, the box will not be plotted.

Why does the box size matter?

Box sizes are what make noiseless charts unique. Getting this part right can make half the work easier. Let us understand why.

We now know how both the box size types plot the bricks on the chart. For illustrations purpose we will assume the price doesn’t have a reversal in the following examples. Let’s say the price moves from ₹100 to ₹200. This is a 100% move. If the brick was set to ₹10, then this could mean a plotting 10 bricks. If the same 100% move was from ₹500, the price would have to plot 50 bricks to reach ₹1000 to complete 100%.

In both the situations, if the brick size was 1%, the price would have plotted 100 bricks. It wouldn’t matter if the price was ₹100 or ₹500. This is the first advantage of using Log bricks. It brings consistency in the chart and the patterns.

A disadvantage of using Linear bricks is that we would have to change the brick size at different price levels. Nifty was trading at 10,000 levels a few years back. The brick size of 50 points could have been used to show a move of 0.5%. But if the same brick size of 50 points is used today, it would show a move of 0.2%. The same 50 points but they would show different moves. This shows inconsistency and the need to update the brick size according to the trading price.

Also, the same brick size couldn’t be used for all the instruments. The brick size would have to change according to the instrument.

Observe the PnF chart below of 360ONE. The charts are Linear and Log charts respectively. Observe that if the charts are set to linear box sizes, important price action is left out of the equation. The entry using this method would have been ambiguous. On the Log charts, the entry and stop loss would have been more precise.

Observe the PnF charts below of ASIANPAINTS. Observe that when the price was trading very low in the beginning, the linear charts showed very good price actions. But as the price started trading higher, the whipsaws in the price were more.

The use of Log brick sizes brings consistency to the charts. Rather than changing Linear box sizes again and again, it is wise to choose a log brick size. This will bring consistency to the analysis as well. Moreover, log brick sizes can be changed as per the trade holding period as well. For example, 1% can be used for investments, 0.5% for positional and 3% for a longer time frame.
Although only PnF charts are posted here as example. the same logic goes for Renko charts as well.