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I investigated P&F for a while and bought a few books, but never really got anywhere with it. P&F, of course, is just another way to chart prices, apparently first used by Charles Dow in the late 1800's. It really is a breakout style of charting, as you will see.
Using the ES as an example symbol. When you plot P&F, the "box size" is the number of points that it takes to make one box (pictured on the chart as either a box or an "x"). So, if you choose "2" as your box size on the ES chart, the charting package requires 2 points of movement in one direction before it will plot anything (in this case, one box or "x"). The TS defaults are red boxes, and green "x's". Therefore, let's say that price has been moving up, so green "x's" are currently being plotted, and let's say the last one plotted at a price of 1130. If price moves from 1130 to 1131.75, nothing will happen - your last box or "x" will remain at 1130. Once price hits 1132, then a new green "x" will appear. Similarly, if red boxes are currently plotting, then it will take 2 points of downward price movement, before another red box is plotted. Make sure that's clear, because the next part can be confusing.
The "Reversal" setting is for how many boxes or x's it takes before the plotting reverses color. Let's set "Reversal" to 3. Therefore, if the chart is currently plotting green x's, and the last one plotted at 1132, and the market starts taking a dive, it will take 6 points of downward movement (box size times reversal size, therefore 2 times 3, in our example) before anything is plotted. Therefore, nothing will be plotted until price drops to 1126. When it DOES plot, it will all of a sudden be 3 red boxes. That's right, you won't get box 1, then box 2, then box 3. You get all 3 at once. Let this sink in before you continue.
Now, instead, let's say that after hitting 1132 that price rises to 1133.75 and then drops and fluctuates between 1133.75 and 1126.25. NOTHING WILL HAPPEN ! Nothing will plot, because you haven't gone up 2 points or more, and you haven't gone down 6 points or more. As I said earlier, it really is a breakout style of charting. Also notice that "time" is taken out of the charting altogether. It could take 5 minutes to form the next box, or several weeks.
Your second question - is it effective.....? It's not any better than time or tick based charting. It's just different. The main benefits would be that it takes the time element out, and it takes the noise out. Also, if you believe that round price numbers have an effect on traders, then you can set the box and reversal settings to activate only on round numbers.
What are the P&F limitations ? I don't really know how to answer that. After knowing how it works, and playing with it, I'm sure you will see what you determine to be limitations.
What Strategies are used? Traditional chart patterns are usually used to trade these, ie. they form triangles, flags, double tops & bottoms, trendlines, support & resistance levels, etc. Thomas J. Dorsey is sort of an acknowledged expert on P&F, and he's written a couple of good books on it. He quotes some statistical analysis on P&F chart patterns (similar to what Thomas Bulkowski has done for bar charts) and claims some very high rates of success. For example, here's one statistic:
In a Bull market (whatever the definition of that is...) Double Tops are 80.3% profitable, with an average gain of 38.7%, taking an average of 11.5 months. Of course, having read all of the above, you would need to question what stocks were in the statistics, what were the box and reversal settings, etc. - but I just include that as an example. My feeling from his books is that P&F is more suited to long term investing/trading.
Here's Thomas Dorsey's company web page http://208.149.108.67/cgi-bin/foxweb.exe/welcome for further information
Hope this is helpful
Using the ES as an example symbol. When you plot P&F, the "box size" is the number of points that it takes to make one box (pictured on the chart as either a box or an "x"). So, if you choose "2" as your box size on the ES chart, the charting package requires 2 points of movement in one direction before it will plot anything (in this case, one box or "x"). The TS defaults are red boxes, and green "x's". Therefore, let's say that price has been moving up, so green "x's" are currently being plotted, and let's say the last one plotted at a price of 1130. If price moves from 1130 to 1131.75, nothing will happen - your last box or "x" will remain at 1130. Once price hits 1132, then a new green "x" will appear. Similarly, if red boxes are currently plotting, then it will take 2 points of downward price movement, before another red box is plotted. Make sure that's clear, because the next part can be confusing.
The "Reversal" setting is for how many boxes or x's it takes before the plotting reverses color. Let's set "Reversal" to 3. Therefore, if the chart is currently plotting green x's, and the last one plotted at 1132, and the market starts taking a dive, it will take 6 points of downward movement (box size times reversal size, therefore 2 times 3, in our example) before anything is plotted. Therefore, nothing will be plotted until price drops to 1126. When it DOES plot, it will all of a sudden be 3 red boxes. That's right, you won't get box 1, then box 2, then box 3. You get all 3 at once. Let this sink in before you continue.
Now, instead, let's say that after hitting 1132 that price rises to 1133.75 and then drops and fluctuates between 1133.75 and 1126.25. NOTHING WILL HAPPEN ! Nothing will plot, because you haven't gone up 2 points or more, and you haven't gone down 6 points or more. As I said earlier, it really is a breakout style of charting. Also notice that "time" is taken out of the charting altogether. It could take 5 minutes to form the next box, or several weeks.
Your second question - is it effective.....? It's not any better than time or tick based charting. It's just different. The main benefits would be that it takes the time element out, and it takes the noise out. Also, if you believe that round price numbers have an effect on traders, then you can set the box and reversal settings to activate only on round numbers.
What are the P&F limitations ? I don't really know how to answer that. After knowing how it works, and playing with it, I'm sure you will see what you determine to be limitations.
What Strategies are used? Traditional chart patterns are usually used to trade these, ie. they form triangles, flags, double tops & bottoms, trendlines, support & resistance levels, etc. Thomas J. Dorsey is sort of an acknowledged expert on P&F, and he's written a couple of good books on it. He quotes some statistical analysis on P&F chart patterns (similar to what Thomas Bulkowski has done for bar charts) and claims some very high rates of success. For example, here's one statistic:
In a Bull market (whatever the definition of that is...) Double Tops are 80.3% profitable, with an average gain of 38.7%, taking an average of 11.5 months. Of course, having read all of the above, you would need to question what stocks were in the statistics, what were the box and reversal settings, etc. - but I just include that as an example. My feeling from his books is that P&F is more suited to long term investing/trading.
Here's Thomas Dorsey's company web page http://208.149.108.67/cgi-bin/foxweb.exe/welcome for further information
Hope this is helpful
