logarithmic vs linear scale

milind

Active Member
#1
Hi,

I was looking at a chart TradersEdge had posted for Alok Industries last month, Alok Industries - Mid cap stock pick, and was wondering why the chart pattern looked different when I looked at it on yahoo. The difference was that yahoo chart was on log scale. It seems to me that patterns - especially trendlines will look different in the two (a streight line on linear will be curvy on log).

Is there any consensus on which scale is better?

Thanks and Best Regards,

-- Milind
 
#2
Linear (Arithmetic) Scaling: On a linear (arithmetic) scale chart, the spacing between each point on the vertical scale is identical. Thus the vertical distance between 10 and 20 is the same as the vertical distance between 90 and 100. While this kind of scaling is intuitive and easy to recreate by hand, linear scaling should not be used on charts with large vertical ranges. A move from 10 to 20 is much better than a move from 90 to 100, but on a linear scale they both appear the same.

Logarithmic (Percentage) Scaling: On a logarithmic scale chart, the vertical spacing between two points corresponds to the percentage change between those numbers. Thus, on a log scale chart, the vertical distance between 10 and 20 (a 100% increase) is the same as the vertical distance between 50 and 100. Because these charts show percentage relationships, logarithmic scaling is also called "percentage" scaling. It is also called "semi-log" scaling because only one of the axes (the vertical one) is scaled logarithmically.

Key points on the benefits of arithmetic and semi-log scales:

Arithmetic scales are useful when the price range is confined within a relatively tight range.

Arithmetic scales can be useful for short-term charts and trading. Price movements (particularly for stocks) are shown in absolute dollar terms and reflect movements dollar for dollar.

Semi-log scales are useful when the price has moved significantly, be it over a short or extended timeframe

Trendlines tend to match lows better on semi-log scales.

Semi-log scales can be useful for long-term charts to gauge the percentage movements over a long period of time. Large movements are put into perspective.

Stocks and many other securities are judged in relative terms through the use of ratios such as PE, Price/Revenues and Price/Book. With this in mind, it also makes sense to analyze price movements in percentage terms.

How the security's price is displayed, be it a bar chart or candlestick chart, with an arithmetic scale or semi-log scale, is not the most important aspect. After all, the data is the same and price action is price action. When all is said and done, it is the analysis of the price action that separates successful technicians from not-so-successful technicians. The choice of which charting method to use will depend on personal preferences and trading or investing styles. Once you have chosen a particular charting methodology, it is probably best to stick with it and learn how best to read the signals. Switching back and forth may cause confusion and undermine the focus of your analysis. Faulty analysis is rarely caused by the chart. Before blaming your charting method for missing a signal, first look at your analysis.

The keys to successful chart analysis are dedication, focus and consistency.

Dedication: Learn the basics of chart analysis, apply your knowledge on a regular basis and continue your development.

Focus: Limit the number of charts, indicators and methods you use. Learn how to use these and learn how to use them well.

Consistency: Maintain your charts on a regular basis and study them often (daily if possible).
 
#3
milind said:
Hi,

I was looking at a chart TradersEdge had posted for Alok Industries last month, Alok Industries - Mid cap stock pick, and was wondering why the chart pattern looked different when I looked at it on yahoo. The difference was that yahoo chart was on log scale. It seems to me that patterns - especially trendlines will look different in the two (a streight line on linear will be curvy on log).

Is there any consensus on which scale is better?

Thanks and Best Regards,

-- Milind



Log scaling allows the trader to see a clearer picture of percentage changes than arithmetic scaling when markets move to different price levels.
It tries to measure changes in value, rather than absolute prices.
 

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