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5；640 by passing through the bottom of the column from which that count was。established。 Although the main 45°。trend line （1） is。still intact at this。stage； the evidence for a continuing bull trend is。decreasing。 An upside count has。been negated； two downside counts have been achieved； and some internal 45°。lines。have been breached。
Following the price action； notice that two more upside counts。（f） and （g） of 4；660 and 5；100 were not achieved but all the downside counts （h）； （i）； and （j） of 3；280； 3；660； and 3；620 were； which further adds。to the bearish evidence。 So； long before bullish support line
（1） was。breached； there was。sufficient bearish evidence available to make a decision about the end of the bull trend。
Again； you should not expect targets。to be achieved with precision； but that does not mean that targets。from important patterns。should be ignored if they seem improbable at the time。 For example； horizontal count （k） taken across。the large top between the October 1999 column going into the top and the October 2000 column ing out of the top gives。a target of 1；080。 When this。target was。established in October 2000； it seemed unlikely that it would be achieved； still； it should not be ignored； because the pattern from which it was established is。an important pattern in the chart。 In any case； before 1；080 can be achieved； many other smaller targets。will have to be achieved first； helping to reinforce the likelihood that 1；080 will be achieved。 In fact； the October 2002 bottom was。within 30 points。of the target。
There are； therefore； two reasons。for establishing and analyzing targets； a trend…evaluation element； determined by the achievement or non…achievement of a target； and a prediction element； which helps。to assess。the potential price move。 bining the two is important。 Moreover； clustering targets—when two counts from two different columns or patternse in at a similar level—reinforces。both the chances。of a count in that region being achieved and the importance of the information； if it is。not。
Risk…Reward Ratios From a Point and Figure Chart
The ability to obtain objective targets。from a point and figure chart makes the calculation of risk…reward ratios—or； as。some term them； reward…to…risk。ratios— much easier。 They are calculated by dividing the potential reward by the known risk； thereby。providing a figure that tells。you the number of points。of reward for every point of risk。you take on。 The risk。is。the easy part of die calculation； calculating the reward has。always。been more difficult； causing many to ignore the ratio pletely。 The risk。is。the difference between your entry price and the price at your proposed exit。 In point and figure terms； the exit price is。the level where the first； or sometimes second； point and figure sell signal will be。 The reward in point and figure terms。is。the difference between the point and figure target and entry price。
Risk…reward ratios。are calculated at the time a trade is。entered。 Not only do they tell you whether the trade is。worth taking； on point and figure charts。they also tell you where to place your stop and what the risk…reward ratio is。of using that stop。 The upper section of Figure 8。5 shows。a progression of charts。for Bank。of America。 The first panel shows。a double…top buy signal at point A activating an upside vertical count of 43。 If you place your stop at 28； the first point and figure sell signal； your risk…reward ratio is。5。 If； however； you prefer to place your stop below the bottom of the pattern； your risk…reward ratio is。only 1。7。 The risk…reward ratio therefore helps。you to decide where to place your stop。
The second panel shows。the chart a few columns。further on。 A second pattern breakout occurs。at point B； allowing you to decide the risk…reward ratio of adding to your position。 Stops。at 28。5 or 28 give acceptable risk…reward ratios。of 3。8 or 3。3； respectively。 The third panel progresses。further with another pattern breakout at point C。 The risk…reward ratios。of entering a trade at this。point are an unacceptable 1。2 and 0。7。 The final panel shows。the chart up to date。 The breakout at point D activates another vertical count of 46。 The risk…reward ratios。of acting on this。are 3。4 and 1。5 based on stops。at 35 and 32； respectively。 The initial target of 43 is。reached； as。is。the 46 target a few columns。later on。 Another vertical count is。activated with the breakout at point E。 Risk…reward ratios。are 2。3 and 1。6 based on stops。at 41。5 and 39。5； respectively。 Once again； these help you to assess。whether the trade is。worth taking and which level you will use for your stop。
Risk…reward ratios。work。for down counts。as。well。 The lower section of Figure 8。5 shows。a progression of charts。for Home Depot； The double…bottom sell at point X activates。a vertical down count of 32。75。 The risk…reward ratios。are 3。9 and 1。7； indicating that if you place your stop at 41。25； the trade is。worth taking；
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Log Scaling
One of the greatest innovations。in point and figure charting has。been the development of log scale point and figure charts。 They were introduced in the early 1980s； when technical analysis。software for PCs。made the calculations。possible。 Using a fixed box size of 1 point or 10 points。is。fine if the price remains within a reasonable range； but it's。of little use when the price rises。or falls。by large percentages。 To acmodate increasing prices； point and figure analysts。used to （some still do） change the box size—the value of the Xs。and Os—at specific。price levels。 For example； when the price is。between 0 and 5； a box size of 0。25 is used； when the price is。between 5 and 10； a box size of 0。5 is。used； and so on； with the box。size changing at certain price levels。 Between 50 and 100； the box size would be 1； and between 100 and 200； it would be 2。 This。design has the effect of producing a pseudo log scale chart； but at the same time； it creates problems。 First； 45o trend lines； which must pass。through these box size step…up points； are promised； second； point and figure targets。bee more difficult to establish if the box size changes。part way through the counting column。
The puterization of point and figure charts。enables。true log scale point and figure charts。to be drawn by increasing the value of each box by。a fixed percentage。 This。means。the percentage change throughout the chart isnstant； but the box size at each level varies。 So instead of a box size measured in the traditional fixed number of points； the box size is。measured as。a percentage。 For example； if a box size of 1 percent is。chosen； the size of the box above is。1 percent larger than the box below； or 1。01 times。the size of the box below。
Point and figure construction is。about setting a scaling framework。before the chart is。drawn。 With fixed box size （arithmetic。scale） point and figure charts； the box size determines。the chart grid。 So a box size of 5 points results。in grid values。of 5； 10； 15； 20 points； whereas。a box size of 10 points。results。in grid values。of 10； 20； 30； 40 points。 With a percentage box size （log scale） chart； however； the grid is。determined by increasing the value of each grid point by the percentage。 Mathematically； it's。easier to do this。by taking the natural log of the starting price； as。well as。the percentage increment； and adding the logged increment to the logged starting price to achieve the new grid。 Once the grid has。been obtained； the chart data are logged as。well and the chart plotted using the logged values。 Finally； the logged values。and grid levels。are anti…logged to bring the chart back。to real prices。 The result is。a true log scale point and figure chart in which the box size grows
smoothly as。the price rises； thereby catering to the
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example； at 75； the box size is。1。5； whereas。at 5 it is。0。1。 There is。a smooth； not a stepped； increase in the box value as。the price rises。and falls。
In paring the two charts； notice the large swings。in the arithmetic。chart around the 75 level； indicating that the box size is。too small。 Notice the lack of sensitivity around the 10 level； indicating a box size that is。too large。 The log scale chart adjusts。for this。automatically； because it is。a chart of constant percentage change rather than constant point change。 Trend lines。are valid on both charts； but they pass。through different points。 Point and figure targets。（not shown） will also be different because the column lengths。and pattern widths。are different as。are the values。of the boxes。within the columns。
The decision whether to use log or arithmetic scale is no different from that with bar or line charts。 Log is。better for longer…term analysis and when the price has。risen exponentially。 Arithmetic。is。better for the shorter…term and when the price is within a range。 Some instruments。have linear trends； and some have exponential trends。 The simple rule is。to look。at both； and you will soon see
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are not important； but the level of the target is。 A number of targets have been placed on the chart so you can see the levels。predicted and how these help to confirm or reject the trend。 Notice during the uptrend in relative strength