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. Trading Strategies

    Technical Analysis: What Is A Chart?

    By Cory Janssen, Chad Langager and Casey MurphyIn technical analysis, charts are similar to the charts that you see in any business setting. A chart is simply a graphical representation of a ...
  2. Forex Education

    Differentiate Between Scaling In And Adding To A Loser

    Develop a logical, intelligent approach to currency trading based on 10 key rules.
  3. Trading Strategies

    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. Active Trading Fundamentals

    Five Minute Investing: The World's Worst Trading Strategy

    The next step down our road to investment success involves briefly reviewing the worst stock trading strategy I can imagine, a simple strategy known as scale trading. Why would we want to learn ...
  5. Investing

    Explaining Economies Of Scale

    Is bigger always better? Learn about the important and often misunderstood concept of economies of scale.
  6. Active Trading Fundamentals

    Five Minute Investing: The Reverse Scale Strategy

    I want to emphasize that perhaps the best strategy of all, for most people, is to simply apply the stock picking criteria in the past chapters, then buy and hold their selected stocks without ...
  7. Fundamental Analysis

    Explaining Linear Relationships

    A linear relationship describes the proportionality between an independent variable and a dependent variable.
  8. Forex

    Know the Difference Between Scaling In and Adding to a Loser

    Buy rationally: add to a losing position to lower your average price not on the hope of a reversal.
  9. Forex Education

    Forex Trading Rules: Know the Difference Between Scaling In and Adding to a Loser

    by Boris Schlossberg and Kathy LienOne of the biggest mistakes that traders make is to keep adding to a losing position, desperately hoping for a reversal. As traders increase their exposure ...
  10. Economics

    What Are Economies Of Scale?

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

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center