What is ATR Scaling on the PnF Charts?

Point & Figure Charts (PnF) can be scaled using traditional box scaling, percentage box scaling, user-defined scaling or Average True Range (ATR) scaling. Scaling refers to the box size. Traditional scaling is based on price levels. In other words, the size of the box increases with the price of the stock. Stocks priced from 5.01 to 20.00 scale at 50 cents per box. Stocks priced from 20.01 to 100 scale at 1 dollar per box. Yes, the scale adjusts as the price changes. Below is a traditional PnF chart for Amdocs (DOX) showing the scale adjusting as price changes.

Average True Range (ATR) is a measure of a security’s volatility. In a nutshell, it is based on the high-low range versus the prior close. There is more detailed information on ATR in the Chart School. For now, it is sufficient to know that ATR reflects volatility. This means stocks with higher volatility, like Mosaic, will have higher ATR values than stocks with lower volatility, like Wal-Mart. As of this writing, 20-day ATR for Mosaic was 2.88, while 20-day ATR for Wal-Mart was .76. A larger ATR value means bigger PnF boxes to reflect more volatility. Bigger refers to the value of the box, not the actual size.

The charts below show PnF charts for QQQQ with traditional scaling and ATR scaling. Traditional scaling is 1 point (dollar) per box with a three box reversal. The ATR scaling sets the box at the 20-period ATR value (.68), which is a smaller value. ATR values are not always smaller. It depends on the security involved. Mosaic, with an ATR of 2.88, would have an ATR box size almost three times bigger than traditional scaling. Scaling changes can be made underneath the PnF chart in the Chart Scale section.