A:

The interpretation of a stock chart can vary among different traders depending on the type of price scale used when viewing the data. As this question suggests, the two most common types of price scales are 1) logarithmic (also referred to as log) and 2) linear (also referred to as arithmetic).

A linear price scale is plotted on the side of the chart so that there is an equal distance between the prices, and each unit change on the chart is represented by the same vertical distance on the scale, regardless of what price level the asset is at when the change occurs. By contrast, a logarithmic price scale is plotted so that the prices in the scale are not positioned equidistantly; instead, the scale is plotted in such a way that two equal percent changes are plotted as the same vertical distance on the scale.

logvslinear.gif

As you can see from the charts above, an increase in price from $10 to $15 is the same as an increase from $20 to $25 on the linear chart because both scenarios represent an increase of $5. However, a logarithmic price scale will show the vertical distance between $10 and $15 to be different than the $5 distance between $20 to $25. The reason for this is that a change of $5 (when the price is at $10) represents a 50% increase, while a move from $20 to $25 is a 25% increase. Since a 50% increase is more significant than 25%, chartists will use a larger distance between the prices to clearly show the magnitude of the changes. When using a logarithmic scale, the vertical distance between the prices in the scale will be equal when the percent change between the values is the same. Using the above example, the distance between $10 and $15 would be equal to the distance between $20 and $30 because they both represent a price increase of 50%. In general, most traders and charting programs use the logarithmic scale, but it is always a good idea to explore other approaches to determine which is the most suitable for your trading style.

To learn more, see our Technical Analysis Tutorial.

RELATED FAQS
  1. What are some examples of economies of scale?

    Take a look at different examples of economies of scale, including how marginal costs can be reduced through external and ... Read Answer >>
  2. What are the differences between internal and external economies of scale?

    Take a deeper look at the differences between internal and external economies of scale, and learn why internal economies ... Read Answer >>
  3. How does marginal cost of production relate to economies of scale?

    See how marginal cost of production relates to economies of scale, and why every company should be concerned with reducing ... Read Answer >>
  4. How do economies of scale work with globalization?

    Discover how globalization can lead to unprecedented economies of scale for firms across the world, leading to higher global ... Read Answer >>
  5. What is a diseconomy of scale and how does this occur?

    Take a deeper look into diseconomies of scale, the economic phenomenon that can make companies less efficient as they become ... Read Answer >>
  6. What's the difference between diminishing marginal returns and returns to scale?

    Understand the main differences between the law of diminishing marginal returns and the concept of returns to scale through ... Read Answer >>
Related Articles
  1. Entrepreneurship & Small Business

    Explaining Minimum Efficient Scale

    Minimum efficient scale is the smallest amount of production a firm can achieve while still taking full advantage of economies of scale.
  2. Markets

    What Are The Differences Between Internal And External Economies Of Scale?

    Internal economies of scale are firm specific. External economies of scale occur due to large changes outside of a firm that usually impact an entire industry.
  3. Trading

    Effective Risk Control With Scaling Trading Strategies

    Scaling strategies allow for greater risk control than simple entries or exits, letting traders seek the most advantageous prices available.
  4. Markets

    Explaining Economies Of Scale

    Is bigger always better? Learn about the important and often misunderstood concept of economies of scale.
  5. Markets

    Explaining Linear Relationships

    A linear relationship describes the proportionality between an independent variable and a dependent variable.
  6. Markets

    What Are Economies Of Scale?

    Is bigger always better? Read up on the important and often misunderstood concept of economies of scale.
  7. Markets

    Understanding Diseconomies of Scale

    Diseconomies of scale is the point where a business no longer experiences decreasing costs per unit of output.
  8. Trading

    How To Cover Your Bases After Making A Trade

    Follow up your trade entry with these time-tested risk management strategies.
  9. Investing

    The Linear Regression Of Time and Price

    This investment strategy can help investors be successful by identifying price trends while eliminating human bias.
  10. Trading

    An Introduction To J-Charting

    Learn about a technical tool that's based on the view that markets are energetic systems.
RELATED TERMS
  1. Logarithmic Price Scale

    A type of scale used on a chart that is plotted in such a way ...
  2. Linear Price Scale

    A type of scale used on a chart that is plotted in such a way ...
  3. Scale In

    The process of purchasing shares as the price decreases. To scale ...
  4. Scale Out

    The process of selling portions of total held shares while the ...
  5. Minimum Efficient Scale

    The smallest amount of production a company can achieve while ...
  6. Linear Relationship

    A statistical term used to describe the directly proportional ...
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center