Please note: As I don't have that much time to post all in one go. I decided to go in steps. Whenever I get time I shall try to continue the sequel.
As I explained the chart has got only two variables Box size & reversal. How well one can construct the chart depends upon these two things. Many people often ask the question what's the best box size? Before answering this question, let's understand how it impacts the chart.
Box size is inversely proportional to the sensitivity of the chart. So larger or higher the box size lesser the sensitivity. Box size is the built in filter. Similar like an EMA or SMA in a bar or candlestick chart. As what's the right period of moving average can not be answered so simply this also can not be simply answered straightway. However, one can always use it to one's advantage in a definite way.
Let's take an example. Say we have three different time frames that we study - weekly, daily, hourly! Now putting the same box size in all three definitely does not help! Higher time frame should simply have a higher box size compared to the lower time frame. However, how high or how low is the question.
This can be answered partially if we take help of one technical indicator called ATR (Average True Range). This finds out the true range of any instrument for the following day. A 25% of the ATR in any time frame can be taken as a guiding box size for a three point reversal chart. Why 25%? In P&F we take generally three box reversal. So actually our range also alters in the strike of the fourth box. Therefore, a one-fourth assumption of the range works nice. However, there is nothing better than your visual comfort.
Having fixed the box size, one can do sort of backtesting to check a few things for compatibility. First, check at least one up move and one down move is fitting the 45degree channel line (i.e. touching two peaks or troughs). Second, the VPO or HPO (We will discuss about them in details in subsequent chapter) is working in atleast two or three major occasions. Third, the hard constraint: you must keep the box size to certain minimum level so that the whole of the price movement is contained in the plot area. Look at the following chart for yourself to see how the charts change with varying box sizes for Maruti daily prices. ATR for Maruti is near 50.
In the next sequence, we will evaluate the effect of the "Reversal".
People who follow P&F would request to participate in this discussion. This is just my 0.2 cent, 99.8 is there with you. Would be fortunate even to get 0.1 cent from that.